ARM's strategy is for our technology to gain market share in long-term structural growth markets, such as mobile phones, consumer electronics and embedded digital devices.
ARM Growth Drivers
We focus on three drivers to deliver long term and sustainable revenue growth:
Increase penetration in markets where ARM technology is particularly applicable, gaining royalty revenue from chips used in each consumer product
Increase the value to ARM per consumer product by maximising the number of ARM-based chips in every device
Extend ARM's business model to additional types of technology, generating multiple royalties streams from each chip
In addition, ARM’s financial discipline balances the need for continued investment to generate long-term future growth, with increasing today’s profitability and shareholder returns.
1. How we increase market penetration
ARM has achieved more than 95% penetration in some markets, such as chips for mobile handsets. As ARM’s technology becomes increasingly applicable, this same level of market penetration is also possible in other application areas. These include digital TV, hard disk drives and microcontrollers.
ARM has been at the centre of the development of smarter mobile phones and the introduction of mobile computers such as tablets. The majority of these chips are based on our technology, and ARM is already licensing processors for future generations of computers. Over the last decade, ARM has also developed processors that are suitable for digital devices outside of mobile, and more influential market leaders are making long-term commitments to use our technology in a broadening range of end-markets.
We gain share as semiconductor companies increase the use of our technology in their chips. They utilise our technology because it is cheaper for the semiconductor manufacture and their customers to use ARM technology in their chips than to develop their own proprietary processor and to maintain their own ecosystem. ARM is further developing both new technology and a richer ecosystem so that semiconductor companies will continue to adopt our technology.
To gain share in markets such as hard disk drives, digital TV and microcontrollers we are nurturing new ecosystems and developing new partnerships. It took ARM ten years to gain a high penetration of mobile phones and although the rate at which each market will adopt ARM technology may be different, the underlying market dynamics are similar.
2. How we increase the ARM value per device
As consumer products become smarter they often contain multiple ARM-based chips, each chip providing additional royalty revenue. A typical smartphone can contain three ARM based chips, and as chips in a smartphone tend to be more expensive than in a simple phone, ARM can receive 6-7 times more royalty per smartphone compared to a voice-only phone.
As smartphones are continuing to get smarter, more connected and capable, even more functionality is being introduced to each handset. ARM is working at the forefront of this R&D to ensure that we are developing the right technology to further increase the number and value of ARM based chip per device.
As other consumer electronics products become smarter and more connected they may also contain more ARM-based chips.
3. How we are extending the business model to additional technologies
To generate multiple royalty streams associated with each chip, ARM has introduced a series of new technologies which we believe are suitable to R&D outsourcing and can command an upfront license fee and an ongoing royalty. Over the last few years ARM has introduced two major new technologies that fit these criteria:
Physical IP: providing the building blocks for developing system-on-chip implementations prior to manufacturing.
Media processors: providing specialist on-chip components for accelerating 3D graphics and efficiently encoding/decoding high definition video.
ARM is now licensing these technologies to leading semiconductor companies.
How we are balancing investment in our business with growing profits and cash
ARM specialises in designing innovative technology and developing a sophisticated community of partners to help bring that technology to market. Our people are our strength. They are the ones who design the next generation of technology, and build and maintain the partnership. ARM invests in our employees through hiring both highly educated graduates and seasoned industry experts. We develop and nurture them, helping them to maximise their capability and potential.
In the medium term, we believe that we can grow our revenues at about twice the rate of our costs. This financial discipline will lead to increases in our profitability, free-cash-flow and distribution of excess cash to shareholders.