How ARM makes money
ARM is the world’s leading semiconductor intellectual property (IP) supplier. The technology we design was at the heart of many of the digital electronic products sold in 2010.
ARM has an innovative business model. We licence our technology to a network of Partners, mainly leading semiconductor manufacturers. These Partners incorporate our designs alongside their own technology to create smart, low-energy chips suitable for modern electronic devices.
Why semiconductor companies use ARM technology
ARM designs technology that once was developed by our Partners’ R&D teams, but it is cheaper for them to licence the technology from ARM. The design of a processor requires a large amount of R&D investment and expertise. We estimate that every semiconductor company would need to spend about $100 million every year to reproduce what ARM does. This represents an additional $20 billion of annual costs for the industry. By designing once and licensing many times, ARM spreads the R&D costs over the whole industry, making digital electronics cheaper.
Technologies that are suitable for the ARM business model
ARM’s licensing business started in the early 1990s with the development of our first processor. The processor is like the brain of the chip; it is where the software runs and controls the functionality of the product that the chip is in. ARM designs each processor to be applicable to a broad range of end-markets to maximise the number of companies that can licence each processor. In most years ARM introduces 2-3 new processor designs. Recently, ARM has developed other technologies suitable for a licensing and royalty business model, such as graphics processors and physical IP components.
How ARM creates value
ARM endeavours to recover its costs from the licence revenues of each technology, leaving the majority of royalties as profits. Over the medium term, we expect royalties to grow faster than licence revenues, and we expect that revenues will grow faster than costs, making ARM increasingly profitable. As our customers are the world’s largest semiconductor manufacturers, their regular royalty payments have become a highly reliable cash flow. ARM’s business model is strongly cash generative. In 2010 we generated £180 million of cash. Since 2004, ARM has returned over £400 million of cash to shareholders through a combination of share buybacks and dividends.
ARM business model
The companies who choose ARM technology pay an up-front licence fee to gain access to a design. They incorporate the ARM technology into their chip – a process that often takes 3-4 years. When the chip starts to ship, ARM receives a royalty on every chip that uses the design. Typically our royalty is based on the price of the chip. Each ARM processor design is suitable for a wide range of end applications and so can be reused in different chip families addressing multiple markets. Each new chip family generates a new stream of royalties. An ARM processor design may be used in many different chips and may ship for over 20 years.
ARM’s global presence
Given our broad base of Partners, end-markets and geographies, ARM is not overly reliant on any one company, consumer product or country for its future profits and cash.
ARM licences by region
Over the last 20 years ARM processor licences have been signed mainly by companies in North America and Asia.
- North America45%
- Asia Pacific39%
ARM added net 179 employees in 2010; over 90% were engineers.
- North America27%
- Asia Pacific21%
Revenue by destination