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This year's largest semiconductor IPO is coming.

Author | ZeR0

Editor | Moying

Finally, the long-brewing Arm listing plan is coming to an end!

Core East and West on August 22 news, early this morning, the Japanese Softbank Corp. Group's British semiconductor IP giant Arm Holdings formally submitted IPO documents to the US Securities and Exchange Commission, disclosing its financial details.

The Arm release code is "ARM". Revenue in fiscal 2023 was $2.68 billion, down from $2.7 billion in fiscal 2022, and net profit in fiscal 2023 was $524 million, down from $549 million in the previous fiscal year. Leading the issue, including Goldman Sachs, JPMorgan Chase, Barclays, Mizuho Financial and other 28 investment banks.

Technology giants such as Amazon and Google's parent company Alphabet, chip giants such as AMD, Intel, Nvidia, Qualcomm and Samsung, as well as automakers and Internet of things companies, more than 260 companies reported shipping Arm-based chips in fiscal year 2023.

Arm was founded in 1990 as a joint venture between Icon computer, Apple and VLSI, listed on the London Stock Exchange and NASDAQ stock market from 1998 to 2016, and was acquired and privatized by Japan's Softbank Corp. Group for $32 billion in September 2016. Softbank Corp. tried to sell Arm to Nvidia for $40 billion in 2020, but the high-priced chip deal failed in February 2022.

Arm this IPO is expected in September, the number of shares planned to be sold is not listed in the IPO document. According to previous foreign media reports, Softbank Corp. wants Arm to be valued in the range of $60 billion to $70 billion.

In any case, Arm's listing in the United States will be the largest IPO in the United States since the new US car-building power Rivian raised $13.7 billion in November 2021.

01. Chip shipments exceeded 250 billion US dollars, revenue fell 1 per cent in fiscal year 2023 compared with the same period last year. As the "top" company in the semiconductor IP field, Arm played an important role in driving the smartphone revolution, providing the "brain" for the vast majority of the world's mobile devices-Arm CPU.

By the end of 2022, its energy-efficient CPU has implemented advanced computing in more than 99% of the world's smartphones.

Each CPU has an instruction set architecture (ISA), which defines the software instructions that CPU can execute, which is essentially a common language used by software developers. ISA lays the foundation for large compatible software libraries running on these CPU. Arm ISA is the most popular and popular ISA in history.

Since its inception, Arm chips have shipped more than 250 billion pieces and have more than 15 million software developers. According to IPO documents, Arm estimates that about 70 per cent of the world's people use Arm-based products, with more than 30.583 billion Arm chips shipped in fiscal year 2023 to March 31, 2023 alone, an increase of about 70 per cent over shipments in fiscal year 2016.

In fiscal year 2021, fiscal year 2022 and fiscal year 2023, the annual income of Arm was US $2.027 billion, US $2.703 billion and US $2.679 billion respectively; net profit was US $388 million, US $549 million and US $524 million respectively; R & D expenses accounted for 40%, 37% and 42% of the annual income in the same period respectively; and gross profit accounted for 93%, 95% and 96% of the total revenue respectively.

Changes in annual revenue, net profit and R & D expenses of ▲ from fiscal year 2021 to fiscal year 2023 the decline in revenue in fiscal year 2023 was mainly affected by the decline in global smartphone shipments. In the latest quarter ended June 30, Arm's revenue fell 2.5 per cent year-on-year to $675 million, while net profit more than halved to $105 million from $225 million in the previous fiscal year.

In fiscal 2023, the top five customers accounted for 57 per cent of its total revenue, while the top three accounted for 44 per cent of its total revenue, according to IPO documents. Among them, the largest customer accounts for 24% of the total revenue, while the second largest customer and the third largest customer account for 11% and 9% of the total revenue respectively.

Headquartered in Cambridge, UK, Arm has global operations and R & D centers in the UK, Europe, North America, India and the Asia-Pacific region.

As of March 31, 2023, Arm has 5963 full-time employees in North America, Europe and Asia, of which about 80 per cent (4753) are focused on research, design and technological innovation, own or co-own a portfolio of approximately 6800 issued patents, and have approximately 2700 patent applications worldwide.

Revenue from Chinese mainland accounts for 21%, 18% and 25% of Arm's total revenue respectively. Chinese mainland is the largest customer in fiscal year 2021, fiscal year 2022 and fiscal year 2023.

The change of revenue distribution of ▲ by geographical region from fiscal year 2021 to fiscal year 2023 is that Arm China (Amou Technology) is the largest customer of Arm. In fiscal years 2022 and 2023, the top five customers accounted for about 56% and 57% of Arm's total revenue, respectively, with Amou Technology accounting for 18% and 24% of its total revenue, respectively.

Arm clearly mentions the relationship between Arm and Amou in the IPO document: Amou is an important source of revenue for Arm and an important channel for the Chinese market, and is the exclusive distributor to delegate Arm IP licenses to Chinese customers. Neither Arm nor Softbank Corp. Group can control the operation of Amou Technology, which operates independently.

In March 2022, Arm sold its entire stake in Amou Technology to Acetone Limited, another subsidiary of the Softbank Corp. Group, for about $930 million in exchange for promissory notes equivalent to 90 per cent of the consideration and Acetone Limited shares equivalent to the remaining 10 per cent of the consideration.

As of the date of the prospectus, about 48 per cent of Amou Technology is owned by Acetone Limited (controlled by Softbank Corp. Group and Arm has a 10 per cent non-voting interest), about 35 per cent is indirectly owned by Hopu Investment Management, and about 17 per cent is directly or indirectly owned by other Chinese parties. Arm has a 10 per cent non-voting interest in Acetone Limited, equivalent to about 4.8 per cent indirect ownership interest in Amou.

Since April 2022, Wu Xiongang, the former CEO of Amou and some entities under his effective control, have filed several lawsuits in Chinese courts seeking to challenge certain aspects of corporate governance and the conduct of the board of directors of Amou, according to IPO documents. To date, all cases settled in the court of first instance have been settled in favor of Amou Technology, but are subject to appeal.

Arm believes that if some of these cases are found to be disadvantageous to Amou, it may lead to further changes in the corporate governance and management structure of Amou, which may reduce Softbank Corp. 's ability to effectively supervise Amou and have a significant adverse impact on Arm's business, operating results, financial position and prospects.

In addition, Arm may face increasingly fierce competition with Amou Technology, which develops its own IP.

Under the IPLA terms signed between Arm and Amou, Arm is entitled to about 90 per cent of the revenue that Amou generates on Arm IP products. In fiscal year 2021, fiscal year 2022 and fiscal year 2023, Arm recognized revenue under IPLA terms of $413.1 million, $474.2 million and $649 million, respectively, and fees recognized under the service share arrangement with Amou Technology were $52.7 million, $63.5 million and $64.1 million, respectively.

Although the IPLA clause prohibits Amou from developing microprocessor cores and only allows Amou to use Arm IP to develop derivative products with the consent of Arm, Amou can independently develop competitive products other than microprocessor cores. Arm believes that this may divert customer interest in Arm products and have an impact on Arm's business, operating results, cash flow and financial position.

As of March 31, 2023, Arm's joint venture in China, Amou Technology, accounted for 40 per cent of total accounts receivable.

03. Two major business models and five licensing agreements currently, Arm provides the world's most common CPU architecture and a range of products deployed with CPU, including GPU, system IP, computing platform products, and development tools and software to support its product development and deployment.

Arm offers both licensing (licensing) and royalty (royalty) business models. The license model is paid according to the number of IP licenses, which is an one-time product license fee; the royalty model is paid according to the number of chips manufactured, and the fee is linked to sales volume. Among them, royalty income is the main source of income of Arm over the years.

▲ fiscal year 2021 to fiscal year 2023 Arm external customers and related parties different business model revenue distribution in fiscal year 2023, Arm worked with the top 10 customers by royalty revenue for an average of more than 20 years. Royalties from smartphones and consumer electronics accounted for more than 50 per cent of Arm's royalties in fiscal 2023.

Its business model includes:

1. Arm Total Access agreement: authorize a series of CPU design and related technologies to the customer in exchange for the annual fee determined at the time of implementation of the agreement. Arm reserves the right to add or remove specific products from the package from time to time. The agreement has a fixed duration and may limit the number of parallel chip designs that use the packaged product.

2. Arm Flexible Access Agreement: authorize CPU design and related technology combination to the customer in exchange for the annual fee determined at the time of execution of the agreement; packages licensed under this agreement will not include the latest products of Arm. Although customers are free to experiment with the products included in the Arm flexible access Kit, if the Arm product is included in the final chip design "wafer" and the final result of the semiconductor chip comes out, they must pay an one-time license fee for the specific product.

3. Technology license Agreement (TLA): license a single CPU design or other technical design to the customer in exchange for a fixed license fee. Licenses may be limited by the duration of use and / or the number of times.

4. Architecture license Agreement (ALA): the licensee may develop his own highly customized CPU design that complies with Arm ISA and pays a fixed architecture license fee. Because creating an optimized CPU is expensive and time-consuming, the architecture licensee usually licenses the Arm CPU design to be used as a supplementary processor in conjunction with the licensee's Arm-compatible CPU design, or in other chips where the licensee's own design is not suitable.

5. Royalties: royalties are charged according to the average selling price of Arm-based chips or the fixed fee for each chip. Royalty revenue is mainly affected by the licensee's adoption of Arm products and other factors, such as product life cycle, customer business performance, market trends and global supply restrictions. In fiscal year 2023, royalties accounted for 63% of Arm's total revenue.

Historically, most customers have licensed Arm products under the terms of TLA. In 2019 and 2021, Arm launched Arm Flexible Access and Arm Total Access protocols respectively. In fiscal year 2023, about 46 per cent of Arm royalty revenue came from products released between 1990 and 2012.

04. The total potential market size is more than US $200 billion, and the market share of chips including Arm technology is as high as 49%. As of the date of signing of the prospectus, the relevant directors and management of Arm are as follows:

Among them, Softbank Corp. Group Chairman and CEO Masayoshi son has been a director and chairman of the board of directors of Arm since March 2018. Rene Haas has been the CEO and director of Arm since February 2022.

Arm defines the total potential market (TAM) as including all chips that can contain processors, so its TAM includes master controller chips in smartphones, personal computers, digital televisions, servers, cars and network equipment. Its TAM does not include chips that are unlikely to contain processors, such as memory and analog chips.

In the calendar year ended December 31, 2022, Arm estimated its TAM at approximately $202.5 billion and predicted that TAM would grow at a compound annual growth rate (CAGR) of 6.8%, reaching approximately $246.6 billion by December 31, 2025.

Arm predicts that chips, including Arm technology, will be worth about $98.9 billion by the end of 2022, accounting for about 48.9% of the market. Its market share was about 42.3% at the end of 2020.

Arm expects the mobile application processor market to grow from about $29.9 billion in 2022 to about $36 billion in 2025, with a CAGR of 6.4% over the same period.

In addition to the main application processors, mobile phones also contain many chips, including modems, Wi-Fi, Bluetooth and NFC connection chips, GPS chips, touch screen controllers, power management chips, camera chips, audio chips, etc., which Arm calls "other mobile chip markets". Arm expects the other mobile chip market to remain relatively stable from 2022 to 2025, at about $17.6 billion to $17.5 billion.

Industrial Internet of things and embedded semiconductor TAM include chips for a variety of products, including washing machines, thermostats, digital cameras, drones, sensors, surveillance cameras, manufacturing equipment, robots, motor controllers, as well as urban infrastructure and building management equipment. Arm expects the industrial Internet of things and embedded chip market to grow from about $41.5 billion in 2022 to $50.5 billion in 2025, with a CAGR of 6.7 per cent over the same period.

Arm's market share in the Internet of things and embedded chip market has increased from 58.4% as of December 31, 2020 to 64.5% as of December 31, 2022.

Its network device TAM includes chips deployed in the wireless network, such as base station equipment, enterprise Wi-Fi, and wired network devices such as routers and switches. Arm expects the network equipment chip market to grow from about $17.2 billion in 2022 to about $18.2 billion in 2025, with a CAGR of 1.8 per cent over the same period. Arm's market share in the network equipment market has increased from 18.8 per cent by the end of 2020 to 25.5 per cent by the end of 2022.

The cloud computing market includes the main server chips, data processing units (DPU) and intelligent network interface cards (SmartNIC) that CSP uses to run its operations. Arm expects the cloud computing market to grow from about $17.9 billion in 2022 to about $28.4 billion in 2025, with a CAGR of 16.6% over the same period.

As CSP began to deploy Arm products in self-designed chips used in its data centers, and other CSP began to deploy chips designed by Arm licensors, Arm-based chips continued to gain market share. As a result, Arm expects Arm's cloud computing market share to grow significantly faster than the entire cloud computing market. Its market share in the cloud computing market has grown from 7.2% by the end of 2020 to 10.1% by the end of 2022.

Other infrastructure refers to technical components and systems that support all aspects of computing, networking, and data processing, including chips deployed in high-performance computing (HPC) systems, enterprise servers, and edge networking devices. Arm expects other infrastructure markets to grow from about $12.7 billion in 2022 to about $13.7 billion in 2025, with a CAGR of 2.7% over the same period. Arm's market share in other infrastructure markets has grown from 9.1 per cent at the end of 2020 to 16.2 per cent by the end of 2022.

Arm's car TAM includes all the chips with processors in the car. These include chips for IVI, ADAS, engine management and body and chassis control. Arm expects the automotive chip market to grow from about $18.8 billion in 2022 to about $29.1 billion in 2025, with a compound annual growth rate of 15.7 per cent. Arm's market share in the auto market has grown from 33.0% at the end of 2020 to 40.8% at the end of 2022.

Conclusion: five major trends drive the development of the semiconductor industry, and the Arm Qualcomm lawsuit is pending. From the Arm IPO document, we can see that five key trends are driving the growth and development of the semiconductor industry:

1. Smart + connected devices proliferate and the world is increasingly digital: with the proliferation of Smart + connected devices such as smartphones, wearables, personal computers, tablets and other electronic devices, the world is becoming more and more digital. almost all products are moving towards intelligence and networking.

2. The demand for high-performance and energy-efficient computing is increasing: the large-scale expansion of data, advanced software applications and artificial intelligence is driving the demand for high-performance computing power. In order to solve the increasingly complex workload, a key method is to increase the speed of CPU and expand the number of processor cores per chip. For example, the number of cores per Arm-based "high-end" chip has increased from 8 in 2016 to 192 in 2023. In order to achieve higher computing performance and more energy-efficient chips, chip design needs continuous innovation to meet the market demand for the best balance of performance, efficiency, size and cost in the end market.

3. The complexity and cost of designing cutting-edge solutions are increasing: the resources needed to develop advanced products are huge and continue to grow exponentially with the reduction of process nodes. According to the data of IBS, the IC design cost of 7nm chip is about $249 million, and the IC design cost of 2nm chip is about $725 million. Design partners promote innovation and enhance the competitive position of customers by reducing complexity, risks, and costs in important parts of the development cycle. For example, to design 2nm chips, IBS estimates that software development, verification and IP certification account for 71% of the total cost. In addition, design partners like Arm can demonstrate a deep understanding of their customers' workloads so that they can better integrate themselves into their customers' workflows.

4. More enterprises choose internal development and custom chips: leading OEM increasingly seeks to build custom chips internally to provide higher performance and efficiency for specific use cases at the same or better price. Products such as Amazon Graviton server CPU, which is based on Arm and successfully deployed in Amazon data centers around the world, have demonstrated the opportunity to create a sustainable competitive advantage in this way. Amazon says Graviton is 40% more cost-effective than comparable x86-based systems. This increasing use of internally developed solutions greatly expands the opportunities for Arm.

5. Fully support artificial intelligence computing: CPU is very important in all artificial intelligence (AI) systems. Whether it is dealing with AI load or in combination with coprocessors, the low-power acceleration of algorithms in emerging fields such as large language models, generative AI and autopilot are highly valued. Arm has added new features and instructions to the latest ISA, CPU and GPU to accelerate future AI and machine learning algorithms, and is working with Alphabet, Cruise, Mercedes-Benz, Meta, Nvidia and others to deploy Arm technology to run AI workloads.

Today, Nvidia is the biggest chip winner in the wave of generative AI and big models, becoming the first semiconductor company in the world with a market capitalization of more than $1 trillion. The Grace super chip and intelligent driving computing chip developed by Nvidia for data center all contain CPU based on Arm. Although Nvidia's acquisition of Arm ended in failure, Arm is also expected to be a chip beneficiary of the AI wave with the help of partners such as Nvidia and Qualcomm.

But there are still hidden dangers in Arm's relationship with Qualcomm. This is also reflected in IPO documents, where Arm's lawsuit against Qualcomm and Nuvia for infringement in August last year is still pending. Arm cannot provide any assurance as to the outcome of the lawsuit or how the lawsuit will affect its relationship with Qualcomm. Qualcomm is currently a major customer of Arm, accounting for 11% of Arm's total revenue in the fiscal year ended 2023. The case is under investigation and the trial is scheduled for September 2024, which could require significant legal costs in the future and a significant amount of time and attention from Arm executives or employees, which could distract the business.

This article comes from the official account of Wechat: ID:aichip001, author: ZeR0

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