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Coverage Initiation: ARM Holdings plc
Value Line has initiated coverage of ARM Holdings plc (ARMH) in its flagship product, the Value Line Investment Survey. ARM was formed in October, 1990 as a joint venture between Apple’s (AAPL) U.K. division and another British company, Acorn Computers Limited. At the time, it operated under the name Advanced RISC Machines Holdings Limited. In 1998, the company reregistered as a public company under its current moniker and held its IPO on the London Stock Exchange. Its ADRs also began trading on the NASDAQ National Market in the United States. The principal offices are in Cambridge, England, and ARM employs about 2,400 individuals worldwide.
ARM Holdings designs the technology that lies at the heart of advanced digital products, from wireless networking and consumer entertainment solutions to imaging, automotive, security, and storage devices. It licenses and sells its technology and products to leading international electronics companies, which in turn manufacture, market, and sell microprocessors and related products. The company also offers high-performance and low-power physical library solutions on a variety of processes and provides the necessary development boards, software development toolkits, and software debug tools, which facilitate system design and rapid development of system solutions. Finally, to further support its offerings, ARM continues to grow its on-chip fabric IP, graphics IP, video IP and embedded software business units and also provides training and support services.
The majority of the company’s revenues are generated by receiving an initial license fee and ongoing royalties each time its IP (intellectual property) is incorporated into a semiconductor chip. These royalties are generally based on a percentage of the revenues received by licensees on their sales of products using ARM’s technologies. Accordingly, ARM could continue to receive royalties on its IP even after it stops licensing to new customers.
As a result of this business model, as well as the industry it competes in, its R&D function is extremely important to this company. To this end, ARM’s engineers are involved in researching and developing new versions of microprocessor cores and physical IP technology, as well as related software and tools applications. The company is also involved in collaborative research with selected universities. While R&D costs as a percentage of sales have fallen from 2010 to 2012 (34% to 29%), the dollar amount has increased from £139.7 million to £166.3 million.
For its products, the company seeks partners with diverse geographic locations and a broad base of systems company relationships. ARM markets its architecture and technology directly to its semiconductor partners and other customers from its offices in Cambridge, Maidenhead, Sheffield and Blackburn in the United Kingdom and also from offices in Japan, South Korea, France, Germany, Norway, Sweden, Taiwan, China, Israel, Slovenia, India, and in California, Texas, Massachusetts and Washington in the United States.
The markets for ARM’s products are intensely competitive and are characterized by rapid technological change, which result in frequent product introductions, short product life cycles, and increased product capabilities typically representing significant price/performance improvements. Competition is based on a variety of factors including price, performance, product quality, software availability, marketing and distribution capability, customer support, name recognition, and financial strength. Further, given the way ARM generates most of its revenues, the company’s competitive position is dependent on the success of its partners’ sales. In addition, ARM’s semiconductor customers do not license ARM technology exclusively, and several of them also design, develop, manufacture, and market microprocessors based on their own architectures or on other non-ARM architectures.
Subscribers interested in this technology provider are advised to consult Value Line’s quarterly reports for ARM Holdings plc, as well as any supplemental reports and relevant articles as important news items arise.
At the time of this article's writing, the author had a position in AAPL