Investor Relations

ANNUAL REPORT 2021 Arm: Business Strategy

Reaping the Returns
from Investing for the Long Term

CEO, Arm Limited

Simon Segars

Leading the world in semiconductor technology

Arm is a global leader in the development of semiconductor technology and is central to the pervasive computing that is shaping today’s connected world.
Arm’s processor technology is the world’s most widely licensed and deployed semiconductor design of its kind and is used in virtually all smartphones, the majority of tablets and digital TVs, and a significant proportion of all chips with embedded processors. As new markets for electronics emerge, they are often based on Arm’s advanced processor designs, including IoT, self-driving vehicles, and industrial automation.

Arm’s business model

Arm licenses processor designs to semiconductor companies that incorporate the technology into their computer chips. Licensees pay an up-front fee to gain access to our technology, and a royalty on every chip that uses one of our technology designs. Typically, the royalty is based on the selling price of the chip.
Each Arm design is suitable for a wide range of end applications and can be reused in a variety of chip families to address multiple markets. Each new chip family generates a new stream of royalties. An Arm design may be used in many different chips and may ship for more than 25 years.

Investing for the long term

In our fast-paced world, new applications, device categories and markets are continually emerging, many of which require advanced semiconductors to provide their capabilities. In contrast, it can take many years to develop the technology that is used in these new devices. Arm is investing today for products that consumers and enterprises will start using in 5-10 years’ time. Since being acquired by SBG in 2016, Arm has significantly increased investment in R&D to ensure that it can develop technology suitable for all these new opportunities.

Arm has been investing to develop new processor technology to:

Maintain its market position in areas where it is already strong, such as smartphones, consumer electronics, and embedded computing;
Increase royalty revenue per chip by increasing value where it can provide more technology (graphics processors and machine learning processors) or more valuable technology (one that increases performance and security);
Establish market leadership in emerging technology areas including autonomous vehicles, IoT, and augmented reality headsets;
Introduce new business models to change competitive landscape, for example, by directly licensing its technology to OEMs and cloud companies.

Reaping the returns on investment

After years of accelerated investment, in fiscal 2020, Arm started to see increasing revenue growth as its new products have started to come to market. This is despite the COVID-19 pandemic, and the majority of its customers working from home for the entire fiscal year.

Arm’s technology royalty revenue grew 16.7% year-on-year due to:

The ramp of 5G smartphones sales has been much greater than 4G. As smartphone chip sales normally account for over 50% of Arm’s royalty revenue, this ramp has been a big benefit for Arm.
The rapid global rollout of 5G networks by operators has driven Arm’s royalty revenue as many basestations and wireless network equipment are based on Arm processors.
The beginnings of the ramp of Arm-based server chip.
All the number of chips is currently low, it is big increase on the prior year and is expected to continue to ramp over the next few years.

Arm’s technology non-royalty revenue (technology licensing revenue and software and services revenue) declined 1.7% year-on-year due to weakness early in the year due to uncertainty regarding the impact of the pandemic, which was offset later in the year by:

Recently introduced products such as the Neoverse range of processors for the data center, and Ethos machine learning processors that are taking AI everywhere.
New customers including an increase in the number of start-ups building their first products around Arm technology.

During the year, Arm signed over 160 license deals, which is much higher than its historical run rate. In addition, multiple high-value deals did not contribute much revenue to fiscal 2020 and will yield the majority of revenue in future periods.

It takes our customers time to develop complex system-on-chips, and so licenses signed today are not expected to yield royalty revenue for another 2-3 years. However, if the chips are commercially successful, they can bring additional royalty revenue streams that may last for years, and even decades, to come. Most of Arm’s royalty revenue growth in fiscal 2020, is therefore due to licenses signed in 2017 or earlier.

Since 2020, it was widely reported that some OEMs where struggling to source the semiconductor chips needed for their products. For example, some automotive companies had to pause production due to lack of chips. Part of this problem was caused by the very strong demand for 5G smartphones and networking equipment. Some chip manufacturers prioritized chips for these markets, resulting in shortages elsewhere. As Arm has a very high share of chips going into smartphones and wireless connectivity equipment, Arm benefitted from the higher chip sales in these areas.

Sparking the world’s potential

Arm is hiring brilliant engineers from all over the world and is bringing them together to create the new technology that will spark the world’s potential.
In fiscal 2020, Arm increased its R&D headcount by 11.0% year-on-year, as it continues to develop more advanced technology and to further expand its product portfolio. Arm is confident that consumers will continue to want smarter devices for themselves and their families; enterprises will want to offer more sophisticated products and services using AI algorithms to better match their offerings to their customers. Arm wants its technology to provide the spark that enables consumer and enterprises to fulfill their ambitions.

Arm-based chip shipments^*1
Cumulative licenses^*2

*1: Based on royalty reports received by Arm from its customers during each year. Adjusted to include any catch-up chip shipments if initial royalty reports did not include all Arm-based chip shipments.
*2: Adjusted to remove licenses that are no longer expected to yield future royalty revenue.

Entry into agreement for sale of all shares in Arm with NVIDIA

In September 2020, the Company entered into a share purchase agreement with NVIDIA, whereby the Company will sell all of the shares in Arm in a transaction valued up to $40 billion. See pages 78 and 79 for details.