Every single one of these devices has a chip inside
that has the Arm CPU, and that Arm CPU is the brain of
that device.
There's a company nearly every chipmaker relies on
that doesn't actually make anything tangible.
Yet its blockbuster IPO in September valued it above
$54 billion.
Arm is open for its first trade.
It's the largest public offering in over two years.
Has brought confidence back to the IPO market.
Computer chipmaker Arm Holdings getting a nice
reception from Wall Street today.
Rather than make chips, the UK-based company designs the
architecture, then sells licenses for these
instruction sets to companies that make central
processing units, or CPUs.
What exactly is an architecture?
If you think about the CPU as the brain, those are the
instructions or the commands, if you will, that
tell the brain what to do, how to walk, how to run, how
to lift an object.
It also collects royalties on every chip shipped with
its technology.
Arm is the most pervasive CPU or brain in the history
of modern electronics.
250 billion of those brains that have shipped in our
history. Over 30 billion of those brains ship every
single year.
Arm's customers include Apple, Nvidia, Google,
Microsoft, Amazon, Samsung, Intel, Taiwan Semiconductor
Manufacturing Company.
In short, the world's biggest names in tech and
chips.
Most people think about a device.
Then maybe if they're really sophisticated, they
think about the chip, but they don't think about the
company that came up with the original ideas behind
how that chip operates.
But once you do understand what they do, it's
absolutely amazing.
Arm chips are known for using less power than those
made with rival x86, the older traditional PC and
server architecture used by CPU giants Intel and
Advanced Micro Devices.
Now there's a surge in adoption of Arm.
It's the basis for Apple's M-series of processors,
which have replaced Intel chips in Macs; for Amazon
Web Services' custom server chips; for Qualcomm's
flagship Snapdragon chips that are poised to break
into the PC market.
And now Nvidia and AMD are reportedly working on
Arm-based PC chips, too.
But in recent years Arm has also faced plenty of risks.
About 20% of its revenue comes from China.
Smartphones, which almost all contain Arm processors
are seeing a major sales slump.
And when Nvidia tried to buy Arm for $40 billion, the
deal was blocked by regulators.
That didn't go the way that everyone anticipated or
hoped that it would.
But the sun comes up the next day, right?
And you have to be able to build from that.
CNBC went to Arm in the UK and talked to CEO Rene Haas
to find out how it became the year's biggest IPO with
so many big name customers, in the face of low
smartphone sales and geopolitical
uncertainty.
Arm was founded in 1990 by 12 chip designers working
out of a turkey barn in Cambridge in the UK.
It was originally a joint venture between Apple, Acorn
Computers and VLSI, known today as NXP.
The model was always to come up with a core design that
we would license to lots of different companies.
Apple launched its early handheld Newton device on
the Arm610 processor in 1993.
Way ahead of its time: ran off a battery, had a
display, which kind of goes to what the hallmarks of the
company are.
We were born running a device off a battery that
was going to be low cost. So that was the birth of the
company.
For Arm, they received per unit royalty and they were
able to take that money, reinvest it, hire more staff
and grow and expand.
Arm then struck a deal with Texas Instruments, putting
its processors in early Nokia mobile phones,
beginning Arm's climb to become the dominant
architecture in almost all smartphones today.
There's probably 16 to 20 CPUs alone inside the
smartphone. And it will do things like recognize your
fingerprint, it'll manage the camera, it runs all the
applications.
Arm went public for the first time in 1998.
Chief architect Richard Grisenthwaite was there.
I joined when we were much smaller company and we were
about 100 people, and been very much involved in this
tremendous transition that the company has gone
through, expanding out from targeting one
particular market area into a wide range of different
computing environments.
Arm grew rapidly in the 2000s, with the first
touchscreen phones introduced in 2007, and the
growth of connected home devices in the 2010s.
Arm now has some 6,500 employees globally.
About a sixth of our population is in the U.S.
and a lot of very high quality engineering, both
architecture and microarchitecture, goes on
there. And then we've got a lot of people in the UK and
we've got people also in India and in France and in
lots of other places around the world.
In 2016, Arm went private when it was bought by
Japan's SoftBank for $32 billion.
Now CEO, Renee Haas was president of the IP products
group at the time, spearheading diversification
into emerging markets, including AI.
PC and phone, automotive, data center and IoT.
Every single one of those markets has AI embedded in
some way, shape or form.
Stop, go.
Arm says it has some 6,800 patents worldwide, with
another 2,700 applications pending.
Some of those are for Arm's Neoverse line for
high-performance and cloud computing, which has helped
it break into AI since its launch in 2018.
Nvidia just partnered with Arm on their new Grace
Hopper Superchip, which is designed to combine the GPUs
of Nvidia plus the CPUs of Arm.
Obviously huge for any AI-related things.
That's actually got 72 of our Neoverse cores in it,
plus their own big GPUs.
By bringing those together and tightly coupling the way
that Nvidia has with the Grace Hopper, they're able
to come up with something that's something like 2 to 4
times the performance of what you'd get on an x86
system for a similar amount of power.
But in 2020, Arm owner SoftBank needed cash.
It had lost money on investments in companies
like WeWork and Uber.
So it struck a deal to sell Arm to Nvidia for $40
billion. Eighteen months later, the deal fell apart,
blocked by regulators and a consortium of Arm's biggest
customers that also compete with Nvidia.
It was a long long process.
Disappointed it didn't happen just because we spent
so much time on it.
But I was very confident, whether it happened or it
didn't happen, things were going to turn out great for
us.
Instead, SoftBank announced plans to take Arm public
again and Haas took over as CEO.
Arm made its second public debut on September 14th,
climbing nearly 25% that day.
It's fallen significantly since then.
Although it did beat expectations in its first
earnings report, revenue guidance came in lower than
expected, sending its stock down 7% in extended trading.
Arm makes money in two different ways by selling
different kinds of licenses, charging companies
a fee to access the Arm technology for building
their chips.
And you're collecting royalties for each of these
chips?
We are. Yeah.
Any dollar figure you can put on?
I don't have the numbers off the top of my head, but for
us basically, our model is 60% of our revenues come
from the royalties and growing, 40% of it comes
from our licensing business.
Arm dominates in smartphone processors.
But x86 architecture, developed by Intel in the
70s, still leads in computers and server
processors. RISC-V is the other main competitor.
The free open-source architecture has seen a
recent growth in popularity, with backing
from some of Arm's big customers like Google,
Samsung and Qualcomm.
They may have been seeking alternatives when it looked
like Nvidia was going to buy Arm.
RISC-V sits a few years behind where Arm is at, and
I don't think we're going to hear a lot about it right
away. I do think in low power, in IoT and simpler
designs, that RISC-V does have some traction.
Rival x86, meanwhile, has more software developed for
it than Arm, although that may be changing.
The amount of software support is the thing that
actually tends to determine the success or failure of
that in the long run.
Intel was very good early on with getting a ton of
software support for x86.
Most servers were x86-based, but what's
happened in the server market is that the software
has been componentized.
It's broken up into containers and things like
that, and that makes it easier to run on other
architectures like Arm.
Arm's biggest differentiator is lower power consumption,
something that's helping Arm break into the laptop
market. Apple, for instance, says its Arm-based
M3 chips give the newest MacBook Pro up to 22 hours
of battery life.
Apple's move away from Intel was a big proving
point for Arm's ability to diversify beyond
smartphones.
Nobody really believed, until Apple went all in and
basically cut ties with x86 instruction sets and said,
'We are going to bet the future of the Mac on Arm.'
And that was a huge inflection for the company.
It was a change of the guard.
And this isn't to say that Intel's future is in big
trouble, but it certainly started to raise some
question marks as to, well, if Apple can do it, can
others?
In September, Apple extended its deal with Arm through at
least 2040.
Qualcomm is another major customer making PC
processors using Arm.
Although now Arm is suing Qualcomm over the right to
make certain chips with its technology.
The issue started after Qualcomm acquired CPU
company Nuvia in 2021, and with it, Nuvia's Arm
license.
Nuvia was actually supposed to be designing a server
chip initially, so they had different terms with them,
and so Qualcomm thought they could have the same
terms. Arm felt no, different companies have
different terms. And it's boiled down to essentially
that: legal discussions around what those terms
ought to be.
The case is set to go to trial in 2024, and Qualcomm
remains committed to introducing Arm-based PC
chips on Windows laptops in the next year.
On the server side, Amazon Web Services is the big
player making Arm-based chips for the data center.
And that was the launch of Graviton.
And really from there, Arm went from this mobile, low
power, IoT, automotive, specialty, embedded to holy
cow, we can build next generation servers, PCs, and
of course continue on this massive run of silicon for
smartphones, all based on Arm.
Arm chips have long been in cars, but it's now a rapid
growth area with the rise of self-driving
capabilities.
And actually, it's one of the most computationally
intensive tasks we've ever seen on this planet in terms
of mass deployment of it.
And what we need to provide is a standard platform to
allow the world's software developers to really
concentrate on this incredibly hard task going
forward. And for this reason, we've developed the
AVA development platform, which we're showing here,
which consists of 32 of our Neoverse cores.
Arm is also seeing growth due to a trend of non-chip
companies like Amazon and Apple turning to Arm to
design their own custom silicon, allowing them to
depend less and spend less on historic chip giants.
We've gone primarily from companies who that's all
they did to companies like Microsoft and Apple and
others who are now adding chip design as just a piece
of their business, which means, you know, they've got
a smaller team than entire companies built on that.
And so you have to make that process easier and
simpler. And that, for example, is where Arm is
starting to move in terms of enabling the design of
multiple components that connect together.
They call it compute subsystems.
While more companies are indeed making inroads into
semiconductor design, the recent chip shortage exposed
major concern over the fact that more than 90% of the
world's chips are made in Asia.
Now China and the U.S.
are going back and forth imposing export controls on
chip technologies, which could escalate to impact
Arm's significant revenue that comes from China.
In 2018, SoftBank broke off Arm's China business into an
independent entity, Arm China, that's majority owned
by a group of Chinese investors.
It's essentially to allow us to not only grow our
business in China, which is our essentially base core
business. We set up a distributor Arm, but at the
same time, we also created an R&D arm that allows an
independent entity to develop products
specifically for the China market, some that are
Arm-based but some that are not Arm-based.
Haas says Arm has seen minimal impact from export
controls so far.
China's a good market for us, about 20% of our
business. It's shifted over the years.
It used to be largely mobile phone based.
Now it's mostly around the data center and automotive.
But Arm China was also embroiled in controversy for
years, with SoftBank and Arm trying to oust the CEO
of the China business, Allen Wu.
Despite being fired twice, Wu refused to leave until
last year. Now, several former Arm China employees
are starting a new internal chip design company in China
with backing from Shenzhen's government.
Arm's stock slid more than 5% on the news.
It's been very ugly and kind of messy and confusing.
And now, of course, some of the people there have moved
to start their own company.
But again, a lot of Chinese companies have long standing
relationships with Arm.
So the expectation is they're going to want to
work there because again, they have that huge base of
software. If somebody creates a new architecture,
they have to build the software, and that takes
years and years and years.
In February, Arm China laid off about 100 employees.
Meanwhile, rival architecture RISC-V is
gaining traction in China as an alternative to U.S.-
and Europe-based tech that could end up banned in
China. Geopolitics aside, Arm also faces risk from the
major slump in smartphone sales.
If they were still totally dependent on it, it would
obviously not be great, but because they've diversified
into these other areas, it gives them much more
opportunity. That's why you see them focusing so much on
things like Neoverse for servers, on autonomous
driving with cars and on these embedded devices.
So that's where they see the future moving ahead.
We're not as impacted as folks might think because
one of the trends we've seen, particularly in
smartphones, is more and more Arm processors that go
into those phones. So for us, we've actually seen an
increase in royalty per phone.
Labor is another marketwide headwind.
The world's chip leader, TSMC, is blaming a shortage
of skilled workers for delays at its $40 billion
fab under construction in Arizona.
We had a shortage of talent and now it's hard.
It's hard for Arm. It's hard for our whole industry.
There's no way that demand for semiconductors in the
next 10 to 15 years will abate.
It's only going to increase.
So it's a pretty fierce talent war.
That's why Arm is helping launch a Semiconductor
Education Alliance to create new pathways for
future talent pools, amid the increasing chip needs of
generative AI and the growing list of companies
like Nvidia working on Arm-based processors.
What that's going to mean is increased demand for Arm
technology everywhere, in all those markets that I
mentioned, and more and more compute capability
because every single AI application needs a CPU.
Every single one. You cannot do AI without a CPU.
End stop.