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.
