Arm submitted IPO application to the SEC, and its largest customer is from China

According to news on August 22, early this morning, British semiconductor IP giant Arm Holdings, a subsidiary of Japan’s SoftBank Group, officially submitted IPO documents to the U.S. Securities and Exchange Commission, applying to be listed on Nasdaq under the code “ARM”. Barclays, Goldman Sachs, Morgan Chase, Mizuho, ​​Bank of America and Citigroup are all underwriters of the IPO.

This move will provide Arm's parent company SoftBank with more funds to further invest in startups. At a recent meeting with investors and analysts, SoftBank CEO Masayoshi Son said the company was ready to go "offensive" in artificial intelligence. In the filing, Arm said that $30 billion worth of Arm-made chips were shipped in the last fiscal year and that SoftBank will continue to be Arm's controlling shareholder.

Arm was founded in 1990 as a joint venture between British Aikon Computer, Apple and V LSI. Arm was also a listed company, publicly listed on the London Stock Exchange and the Nasdaq Stock Market from 1998 to 2016, until it was acquired and privatized by SoftBank for $32 billion in 2016. Nvidia made a bid for the company in September 2020, but faced strong opposition from regulators and some major chip companies. SoftBank has suffered huge losses since that failed acquisition, reporting a $3.3 billion loss in the first quarter of this year. Its technology investment arm, Vision Fund, reported a net loss of $3.3 billion in the second quarter, but had investment gains of $1.1 billion, compared with $23.1 billion a year earlier.

Arm plans to start a roadshow in the first week of September. Arm did not disclose the terms of the proposed stock sale in the filing, but it estimates its valuation at $60 billion to $70 billion (approximately RMB 437 billion to 510 billion yuan). Some media said that SoftBank recently spent US$16.1 billion to buy 25% of Arm shares from the Vision Fund. This transaction valued Arm at slightly more than US$64 billion. This IPO transaction may become one of the largest technology issuance transactions in the history of the United States.

Arm's draft documents submitted to regulators show that in the last fiscal year ending March 31, 2023, the company's annual operating income fell by approximately 1% to US$2.68 billion, with net profit of US$524 million.

ARM’s business model and unique position

Arm is a company engaged in chip design and development based on instruction set technology. Headquartered in Cambridge, UK, it has global operations and R&D centers in the UK, Europe, North America, India and Asia Pacific. 

To simply understand, a chip cannot be used directly. There needs to be a "translator" role between the processor and the operating system, that is, an instruction set to promote "mutual understanding" between software and hardware.

For example, the RISC instruction set developed by Arm allows hardware to adapt to software, and this technology was later applied to most smartphones.

Based on this technology field, Arm has opened a new business model-IP licensing.

How to understand this model? There is a vivid metaphor in the industry. If chip architecture design and manufacturing are compared to "cooking", Arm is responsible for writing the recipes, and the hardware manufacturers are responsible for cooking. The recipes include processor authorization, instruction set authorization, physics IP package authorization.

Hardware manufacturers can download recipes, buy ingredients, and cook their own meals, which means they can design their own processors through Arm's IP authorization.

Or ARM processes each dish into a semi-finished product, and the hardware manufacturer reprocesses it and sells it to the OEM. It can also be described as "Arm builds the rough house, and the hardware manufacturer decorates it."

Therefore, Arm’s money-making model is: pay with one hand and license with the other. Arm fully discloses processor design and development and provides some tools to help customers develop.

This profit model that relies on collecting copyright fees has greatly reduced Arm's own R&D costs and risks. Secondly, customers can freely use the purchased intellectual property to create their own businesses.

On the client side, the cooperation ecosystem with Arm as the core includes more than 500 large technology companies around the world, including Apple, Google, Amazon, Qualcomm, Tesla, Samsung, MediaTek, Broadcom, Huawei, etc. These giants all need Purchase ARM's IP license for chip design.

On the product side, without building a single chip, Arm dominates 90% of the world's smartphones, most tablets, and part of the PC market with its underlying architecture, and is gradually penetrating into fields such as autonomous driving chips and industrial robot chips.

Looking at other chip giants, Intel also designs chip architecture, but also lays out chip production; NVIDIA and AMD, which sold their factories, do not make chips, but find OEMs to produce and sell them.

In comparison, Arm's "neutrality" of being in the upstream and not having to compete is considered by the industry to be the reason for its large territory and stable status.

As of March 31, 2023, Arm had 5,963 full-time employees in North America, Europe and Asia, of which approximately 80% (4,753 employees) were focused on research, design and technology innovation, and owned or jointly owned approximately 6,800 issued patents portfolio and has approximately 2,700 patent applications worldwide. 

Since its establishment, Arm has shipped more than 250 billion chips and has more than 15 million software developers. According to IPO documents, Arm estimates that approximately 70% of people around the world are using Arm-based products. In the 2023 fiscal year ending on March 31, 2023 alone, Arm chip shipments exceeded 30.583 billion.

The largest customer is from China

In fiscal year 2021, fiscal year 2022, and fiscal year 2023, revenue from China accounts for approximately 21%, 18%, and 25% of Arm's total revenue respectively. 

Arm China (Anmou Technology) is Arm’s largest customer. In fiscal 2022 and fiscal 2023, the top five customers together accounted for approximately 56% and 57% of Arm's total revenue respectively, with Arm Technology accounting for 18% and 24% of its total revenue respectively. 

Arm clearly mentioned the relationship between Arm and Arm Technology in its IPO documents: Arm Technology is an important source of revenue for Arm and an important channel in the Chinese market. It is the exclusive distributor that sublicenses Arm IP licenses to Chinese customers. Neither Arm nor SoftBank Group has control over the operations of Arm Technology, which operates independently. 

In March 2022, Arm sold all the shares of Arm Technology to Acetone Limited, another subsidiary of SoftBank Group, for a price of approximately US$930 million, in exchange for a promissory note equivalent to 90% of the consideration and an equity interest equal to the remaining 10% of the consideration. Acetone Limited shares. 

As of the release date of the prospectus, approximately 48% of Arm Technology’s equity is owned by Acetone Limited (controlled by SoftBank Group, Arm has a 10% non-voting interest), approximately 35% of the equity is indirectly owned by Hopu Investment Management Company, and approximately 17 % is held directly or indirectly by other Chinese parties. Arm has a 10% non-voting interest in Acetone Limited, which is equivalent to approximately 4.8% indirect ownership interest in ARM Technology. 

According to IPO documents, since April 2022, former ARM Technology CEO Wu Xiongang and some entities under his effective control have initiated several lawsuits in Chinese courts, seeking to challenge certain aspects of ARM Technology’s corporate governance and ARM Technology’s board of directors the behavior of. To date, all cases resolved in courts of first instance have been resolved in favor of Arm Technology, subject to appeal. 

Arm believes that if some of these cases are ruled against Arm Technology, it may lead to further changes in Arm Technology's corporate governance and management structure, which may reduce SoftBank Group's ability to effectively supervise Arm Technology and have a material adverse effect on Arm's business, results of operations, financial condition and prospects. 

In addition, Arm may face increasingly fierce competition with Arm Technology, which develops its own IP. 

According to the terms of the IPLA signed between Arm and Arm Technology, Arm has the right to obtain approximately 90% of the revenue generated by Arm Technology on Arm IP products. In fiscal year 2021, fiscal year 2022, and fiscal year 2023, the revenue recognized by Arm under the terms of IPLA is US$413.1 million, US$474.2 million, and US$649 million respectively, and the fees recognized according to the service share arrangement with Arm Technology are US$52.7 million respectively. , US$63.5 million, US$64.1 million. 

Although the terms of the IPLA prohibit Arm Technology from developing microprocessor cores and only allow Arm Technology to use Arm IP to develop derivative products with Arm's consent, Arm Technology can independently develop competing products other than microprocessor cores. Arm believes that this may divert customer interest in Arm products and have an impact on Arm's business, operating results, cash flow and financial condition. 

As of March 31, 2023, Arm's joint venture in China, Arm Technology, accounted for 40% of total accounts receivable. 

Arm’s listing is SoftBank’s “Plan B”

As early as 2020, Nvidia planned to acquire Arm for US$40 billion. At that time, SoftBank lacked stable cash flow, and selling Arm became its "original plan" to make up for the funding gap.

However, this is not a transaction that can be completed by reaching an agreement between the two parties. This transaction is related to the entire semiconductor market and is known as "the largest semiconductor acquisition in history." It encountered constraints from the industry and regulatory agencies as soon as it was proposed.