After completing the largest IPO of US stocks this year, Arm, a chip design company under SoftBank, has also entered a new stage of operation. The changes in the Chinese market and corporate strategy have become topics of concern in the industry.
On September 18th, Arm CEO Rene Haas gave an interview to media outlets such as Jiemian News, discussing the future development direction of the Chinese market and whether the company’s business model will continue as before.
At this time, it has been four days since Arm went public in the United States, experiencing two trading days. On September 14th, Arm officially debuted on NASDAQ with a closing price of $63.59, which was 24.69% higher than the offering price of $51/ADS. On September 15th, Arm’s stock price failed to continue its upward trend and slightly declined by 4.47% to $60.75, resulting in a current market value of $62.3 billion.
“IPO is an important day for us,” described Haas. In 2016, Arm was acquired and privatized by SoftBank. After a gap of 7 years, when Arm once again went public with its IPO, both the market value and attention it received were much higher than before. Haas expressed satisfaction with the initial stock performance of Arm after going public.
Before joining Arm in 2013, Haas served as Vice President and General Manager of the Computing Products Business Unit at NVIDIA for a period of 7 years. Starting in 2017, he became the President of Arm’s IP Product Group, responsible for global licensing of Arm’s intellectual property (IP). Haas is highly familiar with the Chinese market, having lived in Shanghai for two years and serving as a board member of Arm China, a joint venture between Arm and Chinese partners. In February 2022, following SoftBank’s failed sale of Arm to NVIDIA, Arm shifted towards an independent IPO and Haas took over as CEO of Simon Segars during the same period.
“In 2023, Arm is completely different from what it was in 2016,” recalled Haas. At that time, Arm mainly focused on the smartphone business and drove industry development. Today, Arm’s business has become more diversified, expanding from the mobile network field to areas such as data centers, automotive, networking, and the Internet of Things (IoT). According to Haas’ perspective, with the accelerated popularity of artificial intelligence in various fields, the company will have more growth opportunities.
But after Arm goes public again, it will inevitably face more scrutiny from investors regarding its performance. Regarding this, Hass stated that regardless of Arm’s previous period as a private company or its current status as a publicly traded company, the company’s strategy remains unchanged. “Arm will continue to support our customers, especially in China. I believe the IPO will not change this.”
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According to Kapbook’s IPO prospectus, for the fiscal years ending on March 31, 2021, March 31, 2022, and March 31, 2023, the revenue from mainland China accounted for approximately 21%, 18%, and 25% of its total revenue respectively. And Arm Technology (China) is Arm’s largest customer. For the fiscal years ending on March 31, 2022, and March 31, 2023, the revenue from Arm Technology (China) accounted for approximately 18% and 24% of its total revenue respectively. This means that almost all of Arm’s revenue in China comes from Arm Technology (China).
Arm Technology (China) was established in 2018. Initially, it was a joint venture between Arm and a Chinese company, serving as the main commercial distribution channel for Arm to license its IP to Chinese customers. Its clients include numerous domestic chip companies such as Spreadtrum Communications. There were conflicts between Arm and Arm Technology (China)’s actual controller Wu Xiongang, which reached an impasse at one point. After negotiations, Wu Xiongang was eventually ousted.
“Arm Technology (China) is our partner in China, and I personally participated in the preparation work for establishing the company in early 2017. We are very satisfied with it and will continue to fully support its development.” When talking about Arm Technology (China), Hass mentioned that Arm closely collaborates with their team in serving Chinese customers and will help promote their products. As travel restrictions ease after the pandemic, the Arm team can once again visit China to meet with domestic ecosystem customers.
“IPO will not change our strategy in China, nor will it change our cooperation with Arm Technology (China). We will continue the same mode of collaboration as we did when we were a private company,” Hass told Jiemian News.
From the market perspective, Arm’s business foundation remains robust: Arm architecture chips dominate the majority of the global mobile chip market, and companies like Apple, Qualcomm, Samsung, and MediaTek cannot do without Arm and lack alternatives. As Arm architecture penetrates into automotive and server industries, Amazon and startup server chip company Ampere have become Arm customers, helping to diversify its business. Hass stated that in 2016, around 65% of Arm’s revenue came from the mobile business, but now this proportion has dropped to about 45%, demonstrating the achievements of Arm’s business diversification.
At present, Arm’s revenue mainly consists of two parts: firstly, licensing fees, which refers to the authorization fee paid by customers when using Arm architecture to design chips; secondly, royalty income, which is the percentage that Arm receives from customers after they sell chips designed based on the Arm architecture. The proportion of these two sources of revenue in the latest quarter is approximately 40% and 60% respectively.
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For the licensing model, Arm has made some changes and introduced the Arm Total Access agreement in recent years. This new licensing model is based on a subscription plan and allows customers to be authorized for a range of Arm’s IP, including CPU, GPU, system IP, etc. From an external perspective, it appears that Arm introduced this model to increase revenue.
When asked about concerns from major customers, including MediaTek and Amazon Web Services (AWS), regarding the new pricing model, Haas stated that the new scheme allows customers to sign multi-year agreements as well as long-term agreements ranging from 1 to 3 years. He emphasized that this model has attracted interest from global clients.
“Most of the customers using Arm technology are long-term clients who access our IP and have their engineers conduct experiments. So far, this approach has received very positive feedback,” said Haas.
Arm also emphasizes that its different IP licensing methods coexist, and they are not replacing existing licensing methods with a new one. Customers can choose according to their needs.
For Arm at present, the sluggish demand for electronic consumer goods directly impacts Arm’s business performance. Taking smartphones as an example, according to IDC data, global smartphone shipments in the second quarter of 2023 decreased by 7.8% year-on-year to 265 million units; the organization predicts that annual shipments will reach 1.15 billion units, a decrease of 4.7% compared to the previous year, reaching a new low in the past decade. According to Kapbook’s prospectus, royalties from smartphones and consumer electronics accounted for over 50% of Arm’s royalty revenue in the fiscal year ending on March 31, 2023. Arm admits that if consumers reduce their purchases of related products, it may have an adverse impact on the market demand for its corresponding products.
Regarding this, Hass expressed that the global semiconductor market has cyclical characteristics in the long term. “When you think it won’t rebound, it always finds a way to bounce back. And when you think its growth won’t slow down, it always finds a way to slow down.” He mentioned that due to restrictions imposed by listing rules, he cannot further comment on short-term market predictions.
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