![Newly listed Arm faces its next challenge: jump-starting growth Newly listed Arm faces its next challenge: jump-starting growth](https://i0.wp.com/www.ft.com/__origami/service/image/v2/images/raw/https://www.ft.com/__origami/service/image/v2/images/raw/https%3A%2F%2Fd1e00ek4ebabms.cloudfront.net%2Fproduction%2F034762a5-5914-4924-89f7-b8ba3c121ce2.jpg?fit=%2C&ssl=1)
For years, SoftBank-owned chip design company Arm has happily collected crumbs from the desks of some of the world’s most powerful semiconductor companies. It charges a pittance for its designs, averaging just 9 cents per unit for the 30 billion new computing devices that relied on its technology last year.
Now, as Arm becomes a public company again, it has different ideas: It wants to grab a bigger piece of the semiconductor industry pie for itself.
Arm CEO Rene Haas told the Financial Times: “Every year, more and more chips are equipped with Arm, and these chips also incorporate more Arm technology.” “So we have The compounding effect. We think we have good room to grow over the next few years.”
The pursuit of a bigger share has become central to Arm’s strategy and to the company’s $65 billion valuation on its debut on Thursday. That’s more than 20 times Arm’s revenue last year, at a time when the smartphone market, which accounts for most of its business, has been shrinking.
Haas said the Cambridge-based company was now “more diversified” and that when SoftBank acquired the company, about two-thirds of its revenue came from mobile phone chips, which has now fallen to less than half. “Between 2016 and 2023, we have done a lot of work to transform the company,” he said.
The plan is completely different from what SoftBank CEO Masayoshi Son had in mind when he agreed to pay $32 billion to acquire Arm in 2016. At the time, he rejected the idea of raising Arm’s price to justify the hefty premium paid for a company with advanced technology. Revenue the year before was just $1.49 billion. Instead, the Japanese group’s ambitions are tied to the Internet of Things, with growth expected to be driven by an exponential increase in the number of connected devices rather than rising prices.
While this remains one of Arm’s four market segments, its attention has turned to data centers and automotive markets, which are expected to grow faster and be more profitable. It also claims to capture a higher share of the revenue it generates for smartphone makers.
The new strategy shines a spotlight on an unresolved question that preceded the SoftBank acquisition: Where can Arm find new sales opportunities as its core smartphone business matures?
“This has been their challenge for a decade: ‘How do we grow in our legacy business and how do we build a second business?'” said a former Arm executive. “They never found a second business, and the underlying business was very profitable, but they couldn’t find a way to grow.”
Arm’s $2.7 billion in revenue last year represented just 1.3% of the value of all chips that could benefit from its technology, Arm Chief Financial Officer Jason Child said.
Taking a bigger share depends on finding new types of customers for its technology, while convincing all customers to give up a larger share of sales that rely on Arm’s technology. Instead of relying solely on traditional chipmakers, it is turning to licensing phone makers, cloud services companies and other companies, many of which have turned to developing their own proprietary chips.
Arm revealed in a regulatory filing last month that Apple had signed a new license valid until 2040, suggesting it has become central to its business. The company also holds 10% of the cloud computing market, thanks largely to Amazon’s use of Arm’s designs in the Graviton chips used by its AWS unit.
Meanwhile, Arm has been trying to get higher prices. Bernstein analyst Sara Russo said the push to increase patent rates after the launch of the latest generation technology, Armv9, two years ago echoes previous attempts to use the transition to justify higher prices.
“Devices using Arm are becoming extremely complex,” Haas said. “When geometries move from 10 nanometers to 5 nanometers and below, the time required to design a chip increases significantly. Additionally, the time required to build that chip (through fab, packaging and assembly) also takes longer. ”
Arm’s “compute subsystems,” which encapsulate a range of technologies and designs used to make complex chips, can speed up those processes and speed time to market, he said. “Customers will pay higher royalties for this.”
One banker advising on the Arm deal said it was “not easy” to pitch an IPO to investors for a company that develops chip intellectual property and architecture.
“They’ve done a great job of repositioning themselves,” the person said.
Russo said the company has been working hard to find ways to make its technology more valuable to existing smartphone customers. These include proposing two new contracts aimed at encouraging customers to try a wider range of Arm technology while also making more regular subscription payments.
Taken together, Russo added, these efforts may have enabled Arm to increase royalties on new contracts, demonstrating its confidence in forecasting a return to double-digit growth this year.
“Arm can charge what they like — and they do,” the former executive said. However, driving up prices has also increased the number of customers considering ditching Arm altogether and switching to Risc- The dangers of V, a competing open source technology.
Some observers said the fact that 10 of Arm’s largest customers, including Apple and Nvidia, bought more than $700 million in shares in the IPO should allay such concerns. US chip analyst Pat Moorhead said the presence of large strategic investors “sends a good message about their future”. “For a company like Apple to invest shows that they really think Arm is their future.”
Additional reporting by Nicholas Megaw in New York
Svlook