ARM Holdings Plc. (ARMH) Memo

ARM Holdings plc. (ADR)

Important Company Financial Data Price $ 27.86 Price/Sales 16.79 Market Cap $12.78 B Trailing P/E 70.35 PEG Ratio 2.36 EPS 0.40

Thesis / Key Points Increasing competition in the mobile phone CPU segment with Intel, and even potentially AMD entering this market.

o With the growth of the computer sales slowing to single digits [4.4], Intel and AMD have begun to focus their efforts on the fast growing mobile SoC [System on a Chip] segment, which is expected to grow an impressive 46%.

o Intel has already ported Android OS to its x86 very own line of chips. As a way of undercutting ARM in this fast growing mobile Operating System.

o Intel Medfield Atom based phone are to be released in the next week in select Asian markets, especially India with its recently announced Xolo X900.

As a Fabless company, ARM relies solely on it intellectual property to generate its cash stream. It is highly dependent on its employees to develop new technologies in order to obtain new royalty payments.

o Unlike patents in the software segment, the patents in the hardware sector have a shorter shelf life. For instance, no one would be willing to buy a computer with Pentium III processor when vastly superior chips from both Intel and AMD exist on the market. This rapid evolution in computer hardware follow’s the quintessential laws of computing created by Intel co-founder Gordon E. Moore, who described the trend that chip performance would double in performance every 18 months in his 1965 paper (also known as Moore’s law).

The licensed ARM designs are extensively modified by the companies to the point that the ARM is not able retain any brand value.

o Tegra, Snapdragon, Ax series of SoC all license ARM designs, but they are extensively modified to the point that they each have distinctive traits. If you don’t look at the spec sheet, you will never know that ARM designs were used. [Ex. 7]

o These companies have little hesitation to switch another rival design, if the design is not competitive. Apple made a switch from PowerPC [RISC architecture] to Intel [x86 architecture].

o Motorola is making the switch from the ARM chips to the ones favoring Intel Medfield chips. HTC is reported to switch to another fabless chip designer ST-Ericsson.

o Since each SoC offered by Nvdia, Qualcomm, Apple are very distinct to the point that they could potential undercut ARM. This is not something new, but rather common in other industries.

ARM and its partner can’t even compete with the industry leader [Intel] in the ability to make smaller and more energy efficient chips.

o The current generation ARM chips are 32 nm which is much older design than the 22 nm chips offered by Intel. [Ex. 3] o TSMC, the world largest contract foundry, have problems with their 28 nm process. It is report that they have

completed halted the 28 nm chip facility to make “changes” in mid-February. This means that next generation 28nm Qualcomm [Snapdragon] and Nvdia [Tegra] chips behind schedule.

o Intel is also trying to undercut ARM by offering its expertise in building 22 nm [only company] to ARM competitors, Achronix and Tabula.

Misperception With the explosion of mobile devices, people perceive that ARM will be able to grow with this expanding market.

o From the way ARM Holdings is structured, it does not make money from actually producing chips. It generates revenue from licensing [one-time fee] and royalty payments [per chip] on its existing IP portfolio.

o According to exhibit 4, the royalty and licensing payments per chip has been declining. This is expected to decline even further consider the new competition between Intel and AMD.

The ARM designs chips are more power efficient than similar products offered by Intel and AMD o This is not true, because the mobile SoC offered by Intel far more efficient than the once offered by ARM Holdings. o Intel’s new line of chips, which is to be launched in June are 22nm in size far smaller than the current 32nm offered by

ARM. In general, the smaller size of size of the chips the more efficient they are. [Exhibit 2,3] Many people believe that ARM chips are well rounded, when compared with ones offered by Intel.

o This is far from the truth the ARM chips are not very good at computing, this affects performance in use Java applets and resource intensive programs.

o As more people begin to use their mobile phones to accomplish complex tasks rather than just talking, accessing the internet, and running simple applications; the need for more powerful devices is an ever-growing necessity needed to

Name: Rahul Madhu College/School: SEAS Year: 2014

ARM Holdings Plc. (ARMH) Memo compete in the technology sector. Furthermore, Mobile phone applications are trending closer and closer toward a realm mirroring computing applications found on laptops and even desktops, thus the market will need more robust and power-efficient SoCs which unfortunately ARM is inadequate to produce.

VAR Analyst covering ARMH: [The Benchmark Company] ARM Holdings might be able to create smaller chip design but the real problem is that number of companies building smaller sized chips are getting fewer. This might affect the company future outlook. Analyst covering competitors [Intel, AMD]: [Maxim] ARM Holdings have dominated the smartphone segment for over the last five years, but Intel with its ultra-low power mobile CPU will carve out sizable market share from ARM. Intel is investing heavily in building smaller chips far more than the independent foundries. – Mr. Vendetti Public Brand Appeal: I have created an online poll to find out ARM Holdings’ brand appeal. Sample size: 37 Have you ever used ARM mobile chip? (1) No, I have the iPhone [15/39] (2) No, It is not in my Android phone [16/39] (3) Yes I know about ARM mobile chip and it is in my phone [3/39] (4) No, I don’t own a phone, but smoke signals make a great radiation-free alternative![2/39] (5) No, I rely on the power of telepathy and mental acuity coupled with a wheel-chair to achieve my goals, because I am Professor X! (6) Yes, I love their blue-corn honey cheddar flavor. [1/39] (7) I don’t know [2/39] How It Plays Out ARM holdings will continue to lower its royalty, and licensing fees per chip due to the increasing competition. This allows ARM to keep its competitors from encroaching on its 95% majority smartphone market share. The cost of researching smaller and smaller size chips will continue to eat into ARM’s profits, whereas Intel by 2014 will move on to its more efficient 14 nm processor, which will have lower power consumption than the substandard ARM 28 nm and 22 nm chips. Furthermore ARM’s partner, Qualcomm, is struggling to even build 28nm chips in a reliable format. I believe that it is easy for a company to “design” chips, but the actual implementation requires capital and expertise that clearly ARM and its partners lack. Thus the future of ARM holdings is bleak due to the company’s inactivity in adapting to the current and subsequent market climate. Risks / What Signs Would Indicate We Are Wrong?

ARM diversifies chips to focus more on computing [Intel, AMD] Foray into actual Chip production. This would mean that ARM would be able to extract a higher margin on its chip architecture. ARM expands on its licensing agreement to a joint venture with independent foundries, such TSMC If ARM is able to increase its royalty payments for each chip sold ARM enters a new markets such as the telecom equipment market

Signposts / Follow-Up

Monitor how ARM prices its royalty and licensing payments in the future.

See if ARM’s research spending increases as the chip design reach smaller and smaller nm size.

Be on the lookout for companies switching to rival chip designs.

European Union economic problems Telecom regulations particularly in India

Company Description ARM Holdings plc was founded in 1990 and is based in Cambridge, the United Kingdom. The company designs microprocessors, physical IP, and related technology. The integrated circuits design offered of ARM comprises of embedded memory, standard cell, and input/output components. ARM licenses and sells its technology and products to electronics companies, which in turn manufacture, market, and sell microprocessors. It operates in Europe, the United States, and the Asia Pacific region. The majority of its revenue comes from the Asian market.

ARM Holdings Plc. (ARMH) Memo (Page of Exhibit/s) Exhibit 1: Future of Intel

Source: Intel

Exhibit 2: Performance test

Source: Anandtech Exhibit 3: Power Consumption

Source: Anandtech

ARM Holdings Plc. (ARMH) Memo (Page of Exhibit/s) Exhibit 4: Revenue per unit

Data: Units: (B) 1.6 2.4 2.9 4 3.9 6.5 Units: 2005 2006 2007 2008 2009 2010 Royality& License: (M)

345.7 401.5 426.1 456.5 408.4 543.5

Revenue/ unit: $0.22 $0.17 $0.15 $0.11 $0.11 $0.08 Source: ARMH reports Exhibit 5: ARMH vs. Competitor

Source: Morningstar Exhibit 6: ARMH compare with its peers

Source: Google

ARM Holdings Plc. (ARMH) Memo (Page of Exhibit/s) Exhibit 7: Snapdragon vs. Tegra vs. A5x

Snapdragon Tegra