One of the most asked questions by investors is: ARM has seen many years of fantastic growth, so how is it going to continue to grow from here? I believe that we have many opportunities ahead of us as mobile products become more capable; as more people in the world gain access to smarter devices; and also as ARM technology is increasingly used in a widening range of digital products from sensors to servers.
Fundamentally, we create technology that helps to make consumer and industrial electronics smarter, more capable and more energy-efficient. We provide cost-effective processor technology that is deployed into the products that many consumers and businesses use every day. As these products sell in increasingly high volumes, they help drive ARM’s revenues. We can then invest in the development of new technology in order to generate superior returns for shareholders over the long term.
The first ARM-based chips started to ship in 1991, and by 2001, 1 billion ARM-based chips had been shipped. Today that cumulative number stands at over 60 billion, with 12 billion shipped in 2014 alone, up 16% on the previous year. Just under half of the chips sold by our customers last year went into mobile devices, and the remainder into a vast array of other end markets: digital TVs, cameras, white goods, WiFi routers, printers, disk drives and safety systems in cars.
Today ARM has 1,198 processor licences signed with our Partners. Of the 163 that were signed in 2014, about a quarter are intended for use in mobile devices, so the other three quarters are helping to expand our opportunity into markets beyond mobile.
2014 was not without challenges. Sales of ARM-based chips into mobile devices and consumer electronics were impacted by an inventory correction, so our royalty revenue growth was less than we would normally have expected. These industry-wide inventory corrections occur from time to time, and this is the fifth we have seen in the past decade. They have been relatively short-term, and it is important not to be diverted from our strategy. Careful management of our costs ensured that we were able to maintain our R&D investment plans whilst increasing profits and cash returns to shareholders.
In 2015 we expect royalty growth will accelerate from the levels seen in 2014, helped by new ARM technologies that are being adopted in our key growth areas of mobile computing, enterprise infrastructure and embedded intelligence.
We are already at the start of the next wave of mobile technology. In advanced economies, the smartphone is connecting to other devices such as smart watches and thermostats. This will extend the information and services available to you via your smart mobile device. Also, we are seeing the growth of LTE/4G networks which are dramatically increasing the bandwidth of network connectivity, and reducing the lag in communications. We expect that faster and more responsive networks will change the way we use smartphones, giving these devices the potential to be an even more essential part of our lives.
The ongoing revolution in the use of mobile technology, in developed and emerging economies, is bringing new opportunities for creativity and innovation, based on ARM technology, which will help to shape a more connected world.
With smartphones as an open platform, apps developers don’t need scale to start a business; they don’t need factories, distribution channels or global logistics. With mobile computing, you just need an idea. And we are seeing a similar trend in the Internet of Things (IoT).
In the same way that connecting mobile phones to the internet transformed how we communicate with each other and interact with our data, connecting other devices to the internet could further improve our lives and experiences. And this is the concept of the Internet of Things.
An IoT device may consist of several sensors, a microcontroller to monitor the sensors and a wireless chip to connect the device to a network. Today, the computer power needed to create an IoT device can be found in chips that are small enough to fit into the dimple of a golf ball, cost only a few tens of cents and have a battery life that can last for months.
A new IoT product or service can be inexpensive to design and quick to bring to market. ARM and its Partners have worked together to create a suite of development boards, which can be combined with sensors and motors, to detect, control and communicate with almost anything.
In 2014 we announced the ARM mbed IoT Device Platform that can connect and manage global networks of smart connected embedded computers. We will continue to invest in new technologies that enable the deployment of ARM-based chips.
With more smartphones and tablets allowing everyone to create and access more data, faster and with lower latency, and with more IoT devices connecting and communicating across the network, we are witnessing a huge increase in the demands on mobile and wired networking infrastructure, all the way to the servers within data centres all over the world.
To meet these increasing demands, network operators are building a new generation of infrastructure with much greater capacity. To avoid an associated increase in electricity usage, they are choosing to use more energy-efficient chips for their base stations, switches and routers. This is creating opportunities for chips built using ARM’s most advanced technology, which can help deliver high performance with less energy than previous approaches.
We have already licensed our technology to nearly all the major semiconductor companies who are making chips for this market, and some of these chips are just beginning to ship into 4G and small-cell base stations. With our Partners, we are now working to ensure that there is an optimised software ecosystem to enable carriers and network operators to deploy their services easily on ARM-based networking equipment. Over the next few years we expect our market share in networking infrastructure to grow as more of our Partners start to ship ARM-based chips for networking infrastructure.
The ARMv8-A architecture has been the key technology to enable our Partners to gain share in servers. Processors based on ARMv8-A are able to manage very large amounts of data, can scale to a great many cores in a single chip, and support key server functionality such as error correction and acceleration for encryption. We started work on ARMv8-A in 2007, signed our first licence in 2009 and saw the first commercial chips ship into server applications in 2014. During 2015 we expect several more companies will start to ship ARM-based server chips, and we may also see the first large-scale server systems built.
Our competition continued to be active in 2014. There were new processors and chips announced by competitors, and they had new design wins and started new strategic initiatives. Some competitors are trying to win share in smartphones and tablets, and also to defend their share in markets where ARM’s technology is challenging them, such as in networking infrastructure and servers.
ARM welcomes this competition – together with our Partners, we work hard to make our products as competitive as possible. During 2014, we saw our Partners introduce new technology based on ARM processors from the highest performance chips into servers and smartphones to low-cost, low-power chips for IoT. We have now signed 63 licences with 38 companies for ARMv8-A technology, and in 2014 we started licensing two new ARMv8-A processors.
ARM, its customers and a broader partnership of companies create an ecosystem of innovation and invention. It is critical to ARM’s long-term success that this ecosystem thrives and grows and adapts for the next generation of ARM-based technologies. For an original equipment manufacturer (OEM) to build a smartphone or a server or an internet-connected sensor, they need technology from multiple companies to integrate together into a single end product. ARM and its ecosystem provide this technology from processor designs, to chip designs and manufacturing, to software tools and operating systems, to training and design services.
As ARM technology enters new markets, we invest a lot of time and resources into bringing new companies into the ecosystem, and we help ensure that the relevant technology within the ecosystem works well together. We work with others within the ecosystem to establish standard specifications; we create not-for-profit entities to enable technology collaboration to solve common problems; we use technology from multiple companies to build test chips and example products; and we share our technology plans with companies so we can align our plans for developing technology.
Collectively, the ARM ecosystem is the strongest in the industry.
ARM has always taken a long-term view, as it can take many years for technology to go from an idea being discussed by one of our engineering teams to a design licensed to our Partners, and then to a chip, and then to an end-market product being shipped in millions. This long-term view influences how we invest in the business and how we develop the capability of the people who are at the heart of this business, and the tools and processes that support them.
This long-term view does not prevent us from being nimble when new opportunities present themselves. For example, as we identified an opportunity to develop new products for the IoT, we formed a new team by combining a newly acquired company with parts of existing engineering and marketing teams. We were able to ensure that we had the right skills, technology, partnerships and industry connections to enable ARM to become the primary technology used in all of the IoT end markets.
ARM is continually investigating new markets and experimenting with new technologies to discover new opportunities to grow. Some of these new technologies will be extensions of our existing product portfolios, or we may be able to take our existing technology into new market areas. We may even get the opportunity to create a new technology in a brand new market.
We are now preparing for the next ten years of ARM’s growth. At the beginning of 2014 we reorganised the business, and combined all the divisions together into a single product development team. This is led by the President of Product Groups, who is responsible for developing all of our current product roadmaps. We have also recruited new executives into the positions of CIO, EVP People and General Counsel, and with the retirement of Tim Score, we will soon welcome Chris Kennedy as our new CFO.
I believe these changes will significantly strengthen the ability of the business to deliver our current roadmap, and give us the flexibility to explore new prospects and new directions, and together these will drive ARM’s opportunities for many years to come. In addition, the whole company has placede emphasis on improving our agility and speed, and the effectiveness of the entire organisation. We have been asking: “How can this task be done faster and with higher quality?” and applying our culture of innovation to the way we do things.
Together we are creating an environment where it is easier to get things done, where information flows and is easier to find and share; where repetitive tasks are automated and where our collective brain power can be applied to the most value-add activities – innovating, thinking, listening, collaborating, learning from each other and partnering to build the most successful and strongest ecosystem the technology world has ever seen, and that will drive growth for years to come.