SoftBank’s Arm is seeking the largest Nasdaq IPO in almost two years, targeting a valuation of $60-70bn despite flat revenue and declining net profit.
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Specialist
Former executive at Qualcomm Inc
Agenda
- Evolution of royalty rates and licensing fees
- Arm’s data centre growth outlook
- Competitive dynamics in data centre vs auto and IoT
- LSE vs NASDAQ IPO prospects and potential SK Hynix (KRX: 000660) takeover rationale
- Impact of Arm’s proposed Arm China share transfer and company outlook
Questions
1.
What are the key headwinds and tailwinds for Arm currently and over the past couple of years, since SoftBank acquired it in 2016? How has the semiconductor shortage impacted the company?
2.
Where do you think Arm’s server market penetration will be by 2025?
3.
How much of a risk is Apple moving to RISC-V? How likely is it and what revenue hit might Arm take?
4.
Arm’s latest reporting, which I think came out yesterday, is quite interesting. In FY20, the company’s sales were reported to be about USD 1.9bn and were up 35% to USD 2.7bn in FY21 – above the expectations of USD 2.5bn. What’s driving that increasing growth rate, if not data centre or server?
5.
On the main revenue streams, Arm quotes that its royalty revenue increased by 20% to USD 1.54bn and its licensing revenue increased by 65% to USD 1.13bn. That’s still 57-41 royalty-to-licensing ratio, which doesn’t strike me as a good ratio for future growth. Would it be appropriate to look at that like a book-to-bill ratio and, therefore, if the licensing ratio part was higher, then you’d expect higher future growth?
6.
What do you think an ideal royalty rate-licensing fee ratio might look like?
7.
In FY20, Arm revealed that it signed 160 licensing deals, which is quite a high run rate. Is that number of new licensees sustainable for the company? Could it gain on that in 2022? I imagine it will if its licensing revenue is up 65%.
8.
A portion of the licences signed goes on to become successful chips, with high volumes of royalties paid out over a long period. How many of 100 licence deals signed might go on to be successful chips?
9.
How well-placed is Arm to take advantage of demand from emerging technologies in autonomous vehicles, IoT, augmented reality, high-performance and edge computing vs its competitors? Imagination Technologies comes to mind as a competitor.
10.
Who would you say is the biggest threat to Arm?
11.
How do you think about the TAM of Arm’s end markets in the emerging technologies I just mentioned? How do you see that developing over the next 2-5 years?
12.
How could Arm establish market leadership in emerging technologies before its competitors?
13.
You mentioned Arm said in 2015 it will have 20% of the server market by 2025, but you think the company could only capture 10% of the server market by 2025. What’s driven that miscalculation?
14.
You think the disparity between Arm’s server market capture expectations and your prediction is a matter of emerging competition, which the company hadn’t necessarily factored in. How could that affect the future revenue growth rate? As I mentioned, its revenue is up to USD 2.7bn for FY21, a 35% increase from FY20c. Is that growth rate sustainable over the next 2-5 years?
15.
What are Arm’s main royalty-revenue-per-chip development levers, in terms of trying to grow it to sustain or even enhance the very good growth rate?
16.
Which key end markets do you think it would be prudent for Arm to focus on to realise its growth potential? Some of the big ones are mobile, auto, IoT and data centre.
17.
Is it correct that one of the biggest growth areas for Arm could be data centre but also the AI end market, which you mentioned? How could the company most effectively take advantage of that?
18.
Why has Arm been so strict in stopping customers or licensees from modifying the instruction set? It seems like a pretty obvious way to drive adoption.
19.
Arm has recently developed new products specifically for high-performance computing and edge computing – I’m thinking of Neoverse V1 and Neoverse N2. Who could be the key licensees that the company needs to get on board to make those new products a success?
20.
What different architectural approaches are taken when putting together data centres in terms of the main architectural modules – distributed vs consolidated and so on?
21.
Do you think we could start to see players such as Qualcomm and AWS creating their own IP designs and chips for downstream markets? You mentioned Apple designing its own chips. Is there any opportunity there for Arm?
22.
Could we ever see hyperscalers such as AWS designing their own chips?
23.
If hyperscalers such as Microsoft were to start doing their own designs and used Arm technology while doing that, how much of an opportunity would that present a company such as Arm?
24.
What percentage of a chip’s ASP is made up of IP from a company such as Arm?
25.
What do you think could be the revenue arrangement with Arm and Arm China? I understand that around 20-25% of the company’s revenues come from Arm China, but Arm is a minority owner of Arm China – I think it owns around 47.3% of it.
26.
What would a share transfer mean for Arm’s future revenues and valuation prospects? I know the company might have to do that to list in New York or London.
27.
What do you make of claims, which are somewhat conflicting, coming from Arm China? The company says it can’t survive without the British Arm’s support, then CEO Allen Wu – with whom it’s having a difficult relationship – is saying the company could continue its operations if it were to completely separate from Arm UK?
28.
How do you think Arm China’s margins compare to those of the western business?
29.
What are your thoughts on the potential outcomes for Arm? The company has been quite turbulent over the last year or so. The Nvidia takeover collapsed because of the Competition and Markets Authority in the UK. Now, Arm is mulling over a float in London or New York and is getting a lot of pressure from the UK government to list in London over New York. We’ve also seen plans from SK Hynix to create a consortium to buy it, which is an interesting idea. Which outcome makes the most sense?
30.
If Arm were to float on the New York Stock Exchange – on the NASDAQ – as opposed to in London, do you think that would impact investment in the Cambridge Cluster? Could that impact talent retention?
31.
On listing on the NASDAQ rather than London, the US has some reasonably strong export controls on technology to China. How would that impact potential licensees within China’s market and the relationship between Arm and Arm China if it were to list in the US and the IP then resided in the US?
32.
Is there anything else you’d mention about Arm that you think is important to highlight?
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