In the last five years the share price of British multinational ARM Holdings has soared. The chip designer’s chief marketing officer Ian Drew explains the strategy behind the rise
Lest anybody need reminding of the hyperbole and hubris that defined the dotcom bubble, they need only read business headlines from July 2000. “A third of Arm staff are paper millionaires” shrieked the Guardian, pointing out that – thanks to a surge in its share price – 150 of the computer chip designer’s staff owned stock over £1m.
“Even the administrative secretary is a millionaire several times over,” said Arm Holdings’ HR director. Not bad for a firm founded in a former turkey coop 10 years earlier.
Fourteen years on, Ian Drew, Arm’s chief marketing officer and executive vice-president business development, laughs, “I wasn’t there then so I wouldn’t know!”
And yet it’s clear that, while many other dotcom darlings have fallen by the wayside, Arm Holdings is every bit – if not more – successful than it was at the millennium’s dawn.
Arm’s microchip designs are found in more than 95 per cent of the world’s smartphones. The tech group’s partners ship 10.4 billion chips worldwide annually – turnover for 2013 was £714.6m. And with the onset of the internet-of-things, the presence of Arm-designed embedded chips in everyday devices augurs well for the firm.
During the dotcom crash, the stock price of the Cambridge-based multinational (which started life as 1980s home computer maker Acorn) dropped to 38p – a staggering fall from its 1998 flotation price of 575p a share. For the next seven years, Arm Holdings soberly focused on “re-shaping our product line”, and launching its Cortex processor brand.
Fortunately for Arm, when the world plunged into recession in 2008, it coincided with the smartphone revolution. Thanks to a deal inked with Apple in 1990, Arm Holdings was well-equipped to cope, with its chips providing the ‘brains’ for the nascent iPhone. Volume sales of the iPhone went from 700,000 in 2007 to 5.2m the following year, helping Arm outperform the rest of the semiconductor industry, with shares rising to 190p in early 2010.
“This is partially down to the growth of the smartphone,” says Drew. “At the time I remember Intel saying, ‘the internet only runs on Intel’. But then people started thinking, ‘I don’t need a laptop or PC to run the internet. I can do everything I want from this phone. The battery life lasts all day, I can do all the browsing I want.’ It became fashionable. But the core aspect wasn’t so much the phone, more the whole connected internet thing.”
“The recession may have helped us,” says Drew, who joined Arm Holdings from rivals Intel in 2005. “People looked at what they were spending. At the time it was laptops, and then [after smartphones launched] they were thinking, ‘I could use my phone to access the internet.'”
And thanks to a partnership deal with Android in 2008, many rival devices to the iPhone were harbouring Arm chips too. Moreover, thanks to its unique business model (Arm doesn’t make the chips it designs – it licenses the design technology to customers like Nokia, receiving royalties), Arm bolstered success by securing a raft of new licences in 2009.
However, “a lot of our profitability comes from the royalty side, which, thanks to phones and tablets, grew faster than licensing in this period.”
In February 2010, ArmHoldings joined the FTSE100, after reporting full-year profits of £96.8m. The launch of Apple’s iPad, powered by Arm chips, in April 2010 (14.5m sales by the end of the year) also boosted profits.
Throughout 2010, Arm’s rapid growth continued, thanks to higher royalty rates and increased market share – in the September, Samsung picked up Arm’s next generation technology for its smartphones, tablets and netbooks. In January 2011, Arm’s share price was boosted after news broke about its deal with Microsoft.
“We announced a deal with Microsoft in December 2011, which included what later became Windows RT. Microsoft also announced Surface [a series of tablets, some based on Arm technology]. We still don’t have a significant market share in desktop PCs based on Windows, but we continue to have a good relationship with Microsoft,” says Drew.
The Seattle tech giant announced the next version of Windows – the future Windows RT – would run on Arm designs. The industry was shocked – until then Intel chips had been the backbone of Microsoft’s PC sales. The surge in demand for smartphones was boosted in October 2011 when Arm unveiled its new chip design (fig 3) with the Cortex-A7, extending smartphone power by 70 per cent.
“Our product line is split into Cortex-A (‘A’ for application processes, which goes into phones) and Cortex-R (for real-time, which goes into braking systems on cars). We work very closely with our partners on each generation launch and the Cortex-A7 was targeted at mid-range smartphones, which was experiencing a lot of growth at the time. You’ll see Cortex-A7 in phones on the market now – it’s been one of our strongest performers.”
By early 2012, the number of Arm chips in mobile phones and computers was 1.2 billion, up 10 per cent year-on-year. However, growth plateaued, with Arm undergoing a period of consolidation, partially due to long-term investors deciding to cash in their shares. Arm Holdings’ 100 per cent market share in the smartphone and tablet markets was threatening to crack too, after Intel announced at 2012’s Las Vegas Consumer Electronics Show that it would enter the smartphone market.
“We knew Intel would do something like this,” says Drew. “But we’re focusing on driving energy efficiency, making sure innovation happens.”
Despite gloomy statements in 2012 from Apple (consumers were delaying purchases until the next iPhone launch), Arm Holdings prospered by boosting its customer base and through healthy licence fees. In April 2013, £1.3bn was added to its market value, with royalties rising by 33 per cent (the chip market was trundling along at two per cent growth).
“We have a business model for the 21st century – we design a core for a chip and then license that to hundreds of partners for tens of millions of dollars,” says Drew. “We help them design the chip itself and, 18 months later, a chip pops out the other end. When they sell that chip to a phone or braking system manufacturer, we get a royalty on that chip. It works because it’s a shift away from the industry of having R&D engineering done at a critical point in the ecosystem.”
Figures were augmented five months later by the launch of the Apple 4G iPhone, resulting in a five per cent jump in share price and the robust dollar. Says Drew: “Around 90 per cent of our revenue comes in dollars.”
Arm is now priming for the internet-of-things revolution. After mobile devices, the second-largest category for Arm is ’embedded’ chips, comprising 3.5 billion of the 10.4 billion chips shipped last year. With 30 billion everyday objects predicted to be connected to the internet by the decade’s end – and Arm receiving a royalty percentage from each device – Drew is right to be optimistic.
“By 2018 I see us getting $20bn worth of chip business from three areas,” he predicts. “Internet of things/connected devices, the phone/service base and the out switches/routers enterprises space. We’ve shipped 50 billion chips since 1990. And 10 billion of that was last year alone. We hope to sell 100 billion at some stage – it’s within sight.”