Arm touts cloud computing expansion, royalties to IPO investors

Makino Milling Machine

07/09/2023 23:51

By Echo Wang and Svea Herbst-Bayliss
       NEW YORK, Sept 7 (Reuters) - SoftBank Group Corp's
 9984.T  Arm Holdings Plc on Thursday told potential investors
in its roughly $5 billion initial public offering that cloud
computing expansion and royalty revenue represented major growth
areas for the chip designer.
    In a gathering of more than 100 investors at one of New
York's most luxurious hotels, Arm Chief Executive Rene Haas and
his management team gave details on the company's prospects
beyond the mobile phone market, of which it already commands a
99% share, people who were in attendance said.
    Weak mobile demand during a global economic slowdown has
caused Arm's revenue to stagnate. Overall sales totaled $2.68
billion in the 12 months to the end of March, compared to $2.7
billion in the prior period.
    Arm is seeking a valuation on a fully diluted basis of $50
billion to $54.5 billion, less than the $64 billion SoftBank
assigned to it in a transaction last month with the $100 billion
Vision Fund that it manages.
    While some investors and bankers that Reuters spoke with
after the presentation were upbeat, it remained unclear how
strong the IPO's reception would be. Arm has already secured the
participation of several customers, including Apple Inc
 AAPL.O , Nvidia Corp  NVDA.O  and Alphabet Inc  GOOGL.O , as
investors in the IPO. It is scheduled to close the books and
price the offering on Sept. 13.
    Arm told potential investors on Thursday that the cloud
computing market, of which it has only a 10% share and therefore
more room to expand, is expected to grow at an annual rate of
17% through 2025, partly thanks to advances in artificial
intelligence. The automotive market, of which it commands 41%,
is forecast to expand by 16%, compared with just 6% growth
expected for the mobile market.
    "They said that Apple use 100% Arm architecture (because of
Arm's dominance in smart phones). The future growth driver is to
expand market share in the Windows PC market," said Ryuta
Makino, a research analyst at Gabelli Funds. 
    Arm also told investors its royalty fees, which account for
most of its revenue, were accumulating since it started
collecting them in the early 1990s. Royalty revenue came in at
$1.68 billion at the latest fiscal year, up from $1.56 billion
from a year before.
    An area of scrutiny for investors has been Arm's exposure to
China, given geopolitical tensions with the United States that
have led to a race to secure chip supplies. Sales in China
contributed 24.5% of Arm's $2.68 billion revenue in fiscal 2023.
    Virtually all of that revenue comes from Arm China, an
independent entity with exclusive rights to distribute Arm's
technology in the country and is Arm's largest customer. ARM
China has a history of late payments and presents "significant
risks" to Arm's business, the company's IPO filing said.
    Arm said in the filing that it was owed $386.9 million by
Arm China as of the end of March. Arm's chief financial officer
has told investors during the marketing of the IPO that the
company was not concerned about being paid back.

 (Reporting by Echo Wang and Svea Herbst-Bayliss in New York;
Additional reporting by Max Cherney in San Francisco; Editing by
Greg Roumeliotis and Richard Chang)
 ((Greg.Roumeliotis@thomsonreuters.com; +1 646 223 6022; Reuters
Messaging: greg.roumeliotis.thomsonreuters.com@reuters.net))