Outperforming the market
The semiconductor industry demonstrated strong growth in 2010, following the downturn of 2009. ARM’s royalty revenue outperformed the industry in the recovery as well as the downturn.
In 2010 the industry grew by about 23%1 over 2009, and ARM grew by about 29% during the same period. ARM outgrew the semiconductor industry through both the downturn and the recovery, and expects to continue this outperformance as we gain share.
This year our customers have increased their R&D investments. However, they are still looking to reduce their long-term costs, and have continued to outsource some of their development by licensing ARM’s technology.
In 2010 ARM signed 91 processor licences, including ten for graphics processors, and we also signed nine physical IP foundry platform licences. In addition, we have seen customers who have licensed ARM technology in one division now start to reuse that design in other areas of their business.
For example, STMicroelectronics licensed ARM’s Cortex-A9 originally for use in applications processors for mobile phones. They are now also using Cortex-A9 in chips for digital TVs.
Shortly after the start of 2011, Microsoft announced that the next version of the Microsoft Windows operating system and Microsoft Office would be available on ARM processor- based chips. This will help ARM’s licensees to win designs in mobile computers and PCs where consumers expect to find Microsoft’s products.
ARM partners reported shipping over six billion ARM processor-based chips in 2010. This has taken our market share from 23% in 2009 to 28% to 2010.
Analysts are divided on how the industry will fare in 2011 and beyond. The probability and duration of another recession is unclear, but any reduction in consumer spending may impact both industry revenues in the short- term and the longer term investment plans of technology companies. However, we believe that our innovative business model will enable us to continue to gain market share in long-term secular growth markets.
1Source: Semiconductor Industry Association, November 2010
Building the base of licences that will drive future royalties
Every licence represents the opportunity for a future royalty stream. In most years ARM adds between 60-90 processor licences to its existing base of licences. In 2010, we signed 91 processor licences, taking the licensing base to nearly 750 licences. As companies looked to take advantage of the opportunities the recovery was creating, they still wanted to manage their own costs. This led to strong licensing in 2010, as companies chose ARM processors for a broadening range of end markets. This included influential market leaders such as Microsoft taking their first ever ARM technology licence, and companies such as Freescale announcing that they are planning to use ARM technology in their MCU division for the first time. ARM also introduced new processor products that will take ARM into new markets such as servers and digital signal controllers. ARM technology is becoming more broadly applicable as digital electronics continue to demand smarter chips to control the world in which we live. ARM continues to see licensing and design wins within mobile products, and increasingly ARM is being designed in other non-mobile applications such as digital TVs, hard disk drives and microcontrollers.
The future opportunity
ARM expects that its customers will continue to re-equip themselves with the latest processors for their existing product lines. In addition, ARM’s technology is becoming increasingly relevant to new markets such as sensors, mobile computers and servers; leading to new customers taking their first ever ARM licence.
Licenses by end-market
Growing the number of ARM processor-based chips
n 2010, ARM’s customers reported 6.1 billion chips shipped, a 55% increase over 2009, much higher than the overall industry’s growth of 30%. This demonstrates ARM’s increasing relevance to equipment manufacturers as they choose ARM processor-based chips over proprietary designs. In 2009 ARM had a 23% market share and in 2010 this rose to 28%. Shipments of ARM processor-based chips into mobile devices increased by 50% driven by the growth in smartphones and tablets. Shipments of ARM processor-based chips into non- mobile devices increased by 60% as ARM technology is deployed in other market segments.
Compared to 2009, ARM’s underlying royalty revenue grew by 36% (excluding $9 million of catch-up royalty received in Q2 2010). ARM expects unit shipments and royalty revenue to grow faster than the semiconductor industry as ARM continues to gain share. Shipments of ARM processor-based chips are growing most rapidly in microcontroller products as several major semiconductor vendors ramp into high volume.
The future opportunity
As ARM technology continues to be chosen by market leaders developing chips for a wide range of end-markets, we expect to continue to gain share. In addition, with major semiconductor companies, such as Atmel, Freescale, Fujitsu, Infineon and NVIDIA due to start shipping Cortex processors in high volume markets in 2011, ARM expects that Cortex will become a greater proportion of overall unit shipments.
Shipments of ARM processor-based chips bn
Processor family 2010 unit shipments
End-market 2010 unit shipments
Increasing the value that ARM gets for every mobile handset sold
During 2010, the number of mobile phones sold increased by 20% and the number of smartphones sold increased by 55%. Smartphones have more chips per handset than voice-only phones and this has helped to increase the average number of ARM processor-based chips per handset to 2.5 from 2.1 in 2009. Smartphone chips also have a higher price than basic phones, and a typical smartphone will generate about six times more royalty per phone than sales of a voice-only phone. So, more chips and more higher-priced chips are helping to increase the average value ARM gets per handset.
2010 also saw the introduction of mobile computers, such as tablets, utilising ARM technology within the applications processor. Like smartphones, mobile computers can also contain several ARM processor-based chips and generate similar amounts of royalty revenues.
The future opportunity
ARM expects that smartphones will continue to become a higher proportion of the overall handset market, further increasing ARM’s value per handset. At the Consumer Electronics Show (CES) in January 2011, many Original Equipment Manufacturers (OEMs) announced new tablets and other mobile computers, most of them using ARM processor-based chips. In addition, there are other product categories that may soon contain multiple ARM processor-based chips, such as digital TVs and electronic systems within cars.
Average ARM processor-based chips per phone
ARM value per phone
(indexed to 2006)
Increasing market penetration in target end-markets
ARM has increased market share in each of its key end-markets outside of mobile; set-top box and digital TVs, hard disk drive controllers and microcontrollers. ARM is also developing new technology that will position our customers to gain share in markets such as servers and medical devices in the future.
85% Hard disk drives (HDDs) are used in applications such as servers, PCs, laptops and other storage applications. Leading HDD manufacturers are using ARM technology as disk capacity and density increases and the chips controlling the disks become smarter.
35% ARM processor-based chips are used to decode the TV signal, to improve image quality on the screen and to display and control the electronic programme guide. High- end digital TVs are also using ARM technology to connect to the internet.
10% The microcontroller market is highly fragmented, and OEMs are increasingly requesting that their semiconductor suppliers use a common processor architecture. ARM is often the choice as it is a suitable architecture that is available to all the semiconductor suppliers.
The future opportunity
All of these target end-markets have long-term growth prospects and ARM’s market share gains look set to continue as many of ARM’s licensees have announced new products in these areas.
|Year||Hard disk drives||Digital
ARM’s penetration into hard disk drives (HDD) and solid state drives grew strongly in 2010. Leading HDD controller companies designed ARM processors technology into their new products in 2010.
Digital TVs and set-top boxes are becoming more internet connected, creating an opportunity for ARM technology.
ARM processor-based microcontrollers gained share as more leading semiconductor companies launched ARM processor-based products in 2010.
Developing new technology to generate additional royalty streams
During 2010, ARM continued to deliver on its strategic goals to create new technologies that are suitable for licensing to leading semiconductor companies, and for generating additional royalty streams in the future.
Physical IP for advanced manufacturing processes
ARM develops physical IP for use by leading semiconductor companies that manufacture chips using advanced processes. ARM is already the leading physical IP provider and is well-placed as semiconductor companies increasingly outsource manufacturing to ARM’s foundry Partners.
During 2010 ARM saw strong licensing and signed nine foundry platform licences for ARM’s physical IP that will drive future royalty revenues, including TSMC licensing ARM’s advanced physical IP at 28nm and 20nm. In addition, early in 2011, IBM and ARM announced a collaboration to develop advanced physical IP from 20nm to 14nm.
Multimedia IP for enhanced user interfaces
For many consumer electronics devices the user interface is a vital part of the communication with the user. Mobile phones, digital TVs and computers are familiar, and cars, media players and navigation devices are emerging. ARM is developing graphics and video IP to improve the user interface for these devices and so enhance the user experience. During 2010, ARM signed ten graphics IP licences. Also leading semiconductor companies in mobile and consumer electronics markets such as Samsung and STMicroelectronics launched their first chips based on Mali technology.
The future opportunity
With a growing base of licences just starting to sell their chips in high quantities, we expect that the number of chips enabled by ARM’s physical IP and multimedia technology will continue to grow.
Royalties in 2010
Twelve of the top 20 semiconductor companies used physical IP in their chips driving royalties through the foundries.
Video and graphics IP
Six leading semiconductor manufacturers paid royalties on ARM video and graphics IP.
Investing in ARM’s product development capability and operational execution
ARM specialises in designing innovative technology and developing a sophisticated community of Partners to bring that technology to market. Our people are our strength for designing the next generation of technology, delivering it to our customers, and for growing and maintaining the ARM partnership. ARM invests in our employees through hiring a mix of well educated graduates and seasoned industry experts, developing them and providing a supportive culture to maximise their capability and potential.
In 2010 ARM hired an additional net 179 people. Over 90% of our new hires were engineers, to increase our R&D capability. Most of this investment was in our processor and multimedia engineering teams to take advantage of the new opportunities for new ARM technology in servers, computing and 3D graphics.
The future opportunity
ARM expects to continue to invest in its employees as we develop our engineering capability and operational execution. Due to the inherent leverage in the business model, over the medium term we expect that we will be able to grow our revenues faster than our costs.
Number of employees
Investing in innovators
ARM invests in our employees through hiring a mix of well educated graduates and seasoned industry experts, developing them and providing a supportive culture to maximise their capability and potential.
Growing normalised operating margin, EPS, cash generation and dividends
ARM’s business model and exposure to structural growth markets means that ARM is well positioned to become increasingly profitable, to generate cash and to support a progressive dividend. ARM intends to cover most of its operational costs from the licence revenues of each new technology. This leaves the majority of royalties as profits. Over the medium term, we expect royalties to grow faster than licence revenues and costs.
In 2010 ARM’s financial discipline focused investment in areas of maximum opportunity such as the recruitment of more engineers to develop next generation processor IP and multimedia IP.
As our customers are the world’s largest semiconductor manufacturers, their regular royalty payments have become a highly reliable cash flow.
Given our broad base of Partners and end-markets, ARM is not overly reliant on any one company or consumer product for its future profits and cash.
During 2010, ARM generated £180 million of cash, compared to £86 million in 2009. The increase in cash generation is primarily due to the increase in revenue. Since 2004, ARM has returned over £400 million of cash to shareholders through a combination of share buybacks and dividends.
The future opportunity
As royalty revenues become a greater proportion of ARM’s overall revenues, ARM’s profitability and cash generation is expected to increase.
Operating margin %
- Operating margin under IFRS
- Normalised operating margin
Earnings per share pence
- Diluted EPS under IFRS
- Normalised diluted EPS
Normalised net cash generation £m