Prospectus Summary
PROSPECTUS SUMMARY This summary highlights certain information contained elsewhere in this prospectus. This summary may not, and does not purport to, contain all the information that may be important to you, and we urge you to read this entire prospectus carefully, including the “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and the consolidated financial statements of Arm Limited and the notes to those statements, included elsewhere in this prospectus, before deciding to invest in the ADSs.Our North Star
Building the future of computing, on Arm. Together. For everyone.
Our Company
Arm is defining the future of computing. Semiconductor technology has become one of the world’s most critical resources, as it enables all electronic devices today. At the heart of these devices is the CPU, and Arm is the industry leader of CPUs. We architect, develop, and license high-performance, low-cost, and energy-efficient CPU products and related technology, on which many of the world’s leading semiconductor companies and OEMs rely to develop their products. Our energy-efficient CPUs have enabled advanced computing in greater than 99% of the world’s smartphones, for the year ended December 31, 2022, and more than 250 billion chips, cumulatively, powering everything from the tiniest of sensors to the most powerful supercomputers. Today, Arm CPUs run the vast majority of the world’s software, including the operating systems and applications for smartphones, tablets and personal computers, data centers and networking equipment, and vehicles, as well as the embedded operating systems in devices such as smartwatches, thermostats, drones and industrial robotics. We estimate that approximately 70% of the world’s population uses Arm-based products, and the scale of Arm’s reach continues to expand, with more than 30 billion Arm-based chips reported as shipped in the fiscal year ended March 31, 2023 alone, representing an approximately 70% increase since the fiscal year ended March 31, 2016.
Today, any company can make a modern computer chip through the unique combination of our energy-efficient CPU IP and related technologies and our unmatched ecosystem of technology partners, and do it cost effectively due to our flexible business model. Each CPU product can be licensed to multiple companies, leading to economies of scale that allow us to charge each licensee only a fraction of what it would cost them to develop internally, while minimizing their risk and time-to-market. With the complexity of CPU design increasing exponentially, over the past decade no company has successfully designed a modern CPU from scratch. We have been innovating at the forefront of compute technology for decades and have established important relationships with the companies driving the future of computing across multiple industries. More than 260 companies reported that they had shipped Arm-based chips in the fiscal year ended March 31, 2023, including the largest technology companies globally (such as Amazon.com, Inc. and Alphabet Inc.), major semiconductor chip vendors (such as Advanced Micro Devices, Inc., Intel Corporation, NVIDIA Corporation, Qualcomm Inc. and Samsung Electronics Co., Ltd.), automotive industry incumbents, leading auto suppliers, IoT innovators, and more.
The exponential rise in smart devices in both consumer and enterprise markets has increased the demand for chips that provide more computational capability while optimizing energy efficiency. Thirty years ago, the PC was the only computer with which most people would interact at home, work, or school. Then, mobile phones became computers in our pockets and digital TVs became computers in our living rooms. Now, vehicles are effectively computers on wheels, and servers and networking equipment are the computers that connect all these devices and services together. Additionally, there are billions of tiny low-cost devices—from sensors to electric motor controllers—that are now functionally computers, as well. Each of these computers needs at least one CPU, and in many cases more than one. This trend has driven the dramatic growth of Arm-based chips over the past several years.
Our creation of the Arm CPU architecture, the world’s most widely used CPU architecture, has resulted in the proliferation and evolution of computers as people know them today, advancing a paradigm of increasing compute performance coupled with industry-leading power efficiency. We enabled the mobile phone and smartphone revolution, and through our focus on energy efficiency and our history of continuous innovation, we have enabled new categories of “smart” consumer electronics. Today, we are redefining what is possible in industries such as cloud computing, automotive, and IoT. Energy efficiency is not only important for business, but it is also a critical component in achieving sustainability for our planet. This makes Arm CPU technology ideal for current and future computing applications as the demands for compute performance are growing exponentially while the need for low power remains critical.
Every CPU has an ISA, which defines the software instructions that can be executed by the CPU, essentially a common language for software developers to use. The ISA sets the foundation for a large library of compatible software which runs on those CPUs. As the Arm CPU is the most popular and pervasive CPU in history, the Arm ISA is also the most popular and pervasive ISA in history. This means that Arm-based chips have a global community of software developers familiar with how to program the CPU. Chip designers utilizing the Arm CPU can add desired functionality (Wi-Fi connectivity, image processing, video processing, etc.) to create an SoC to meet the needs of any end market.
Our primary product offerings are leading CPU products that address diverse performance, power, and cost requirements. Complementary products such as GPUs, System IP, and compute platforms are also available and enable high-performance, efficient, reliable, system-level creation for a wide range of increasingly sophisticated devices and applications. Our development tools and robust software ecosystem have further solidified our position as the world’s most widely adopted processor architecture and have created a virtuous cycle of adoption, which means that software developers write software for Arm-based devices because it offers the biggest market for their products, and chip designers choose Arm processors because they have the broadest support of software applications.
This combination of pervasiveness and ease of portability has resulted in our CPU designs having the world’s richest software ecosystem, built in partnership with the leading operating systems providers (including Google Android, Microsoft Windows and all major Linux distributions), software tools and game engine vendors (such as Electronic Arts Inc., Unity Software Inc. and Epic Games, Inc.), and application developers. We also support a flourishing ecosystem of third-party tool vendors for embedded software and a vibrant IoT ecosystem. Open-source software plays a vital role in the success of Arm-based chips, and we are committed to contributing to open-source software and tools to ensure our offerings are optimized for the latest technologies.
As the world moves increasingly towards AI- and ML-enabled computing, Arm will be central to this transition. Arm CPUs already run AI and ML workloads in billions of devices, including smartphones, cameras, digital TVs, cars and cloud data centers. The CPU is vital in all AI systems, whether it is handling the AI workload entirely or in combination with a co-processor, such as a GPU or an NPU. In the emerging area of large language models, generative AI and autonomous driving, there will be a heightened emphasis on the low power acceleration of these algorithms. In our latest ISA, CPUs, and GPUs, we have added new functionality and instructions to accelerate future AI and ML algorithms. We are working with leading companies such as Alphabet, Cruise LLC, Mercedes-Benz, Meta and NVIDIA to deploy Arm technology to run AI workloads.
Arm had 5,963 full-time employees across North America, Europe and Asia as of March 31, 2023. We are an engineering-first company, with approximately 80% of our global employees, as of March 31, 2023, focused on research, design, and technical innovation, and we have global operations and research and development (“R&D”) centers in the U.K., Europe, North America, India, and Asia-Pacific. Our headquarters are located in Cambridge, U.K.
For the fiscal year ended March 31, 2023, our total revenue was relatively flat at $2,679 million, as compared to $2,703 million in the fiscal year ended March 31, 2022. In the fiscal year ended March 31, 2023, as a percentage of total revenue our gross profit margin was 96% and operating income margin was 25%. In the fiscal year ended March 31, 2023, we generated net income from continuing operations of $524 million (Non-GAAP net income from continuing operations of $657 million), compared to $676 million (Non-GAAP net income from continuing operations of $663 million) in the fiscal year ended March 31, 2022. For the fiscal year ended March 31, 2022, our total revenue grew by 33%, to $2,703 million, from $2,027 million in the fiscal year ended March 31, 2021. In the fiscal year ended March 31, 2022, as a percentage of total revenue our gross profit margin was 95% and operating income margin was 23% compared to 93% and 12%, respectively, in the fiscal year ended March 31, 2021. In the fiscal year ended March 31, 2022, we generated net income from continuing operations of $676 million (Non-GAAP net income from continuing operations of $663 million), compared to $544 million (Non-GAAP net income from continuing operations of $207 million) in the fiscal year ended March 31, 2021.
Our Journey
History
Established in 1990, Arm began as a joint venture between Acorn Computers, Apple Computer, and VLSI Technology. We were publicly listed on the London Stock Exchange and the Nasdaq Stock Market from 1998 until 2016, when we were taken private by SoftBank Group, our controlling shareholder.
The original joint venture set out to develop a processor that was high performance, power efficient, easy to program, and readily scalable—a goal that continues to define Arm today. Our CPUs initially gained significant traction in mobile phones in the mid-1990s because our energy-efficient processors provided an appropriate level of performance while consuming little power, which was critical for these smaller form factor devices. Over time, mobile phones, and the chips they used, became more advanced and ultimately evolved into the smartphones that are prevalent today. The Arm CPU proved to be critical in enabling the smartphone revolution.
The mobile phone was one of the first consumer electronic devices to evolve into an intelligent, connected, digital device that needed a smart processor to run a growing library of software. With the help of Arm technology, many more devices such as televisions, watches, washing machines, cameras, factory equipment, and others are undergoing the same revolution.
Strategic Evolution
Since becoming a private company in 2016, we have made significant investments to further develop and market our products to build on our success in powering the world’s smartphones and other consumer electronic devices. We have focused in recent years on making Arm the ubiquitous provider of compute technology in all market segments by expanding into new markets, including cloud computing, networking, automotive, and IoT, most of which have strong secular tailwinds. Our investments have resulted in a diversified business with more durable growth.
Key elements of our evolution included:
Industry Background
Semiconductors are indispensable to everyday life. In today’s technology-driven world, semiconductors are the enablers of the devices and infrastructure that facilitate virtually everything people do, such as making a phone call, sending an email, storing files in the cloud, streaming videos, or traveling by car, train, or plane. Almost all of the products and services people use every day rely on semiconductors. Manufacturing, logistics, city infrastructure, and building management also increasingly build their processes and services around semiconductor-enabled devices. As consumers and enterprises continue to demand more from their devices, the pervasiveness of high-performance and energy-efficient semiconductors will continue to expand. We believe there are several key trends driving the growth and evolution of the semiconductor industry.
Proliferation of Smart, Connected Devices Supporting an Increasingly Digital World
The world is becoming increasingly digital with the proliferation of smart, connected devices, such as smartphones, wearables, PCs, tablets, and other electronic devices. Even everyday products like washing machines, thermostats, and utility meters are becoming more advanced. According to Deloitte’s 2022 Connectivity and Mobile Trends Survey, the average U.S. household had 22 connected devices in 2022, doubling from 11 devices in 2019. The market trend to make nearly all products smart and connected is not just limited to consumer electronics, but is also driving a wave of innovation across a broad range of end markets and use cases.
Increased Need for High-Performance, Power-Efficient Compute
The massive expansion of data, advanced software applications, and AI are driving the need for high-performance compute capabilities. To address increasingly complex workloads, a key approach has been to increase the speed of a CPU and expand the number of processor cores per chip. For instance, the number of cores per “high end” Arm-based chip has increased from 8 in 2016 to 192 in 2023. Solely running an existing chip faster may deliver more compute performance, but increasing performance results in higher energy costs, which may cause thermal limits to be exceeded. Collectively, these considerations result in the need for innovation in chip design to address market demands for an optimal balance of performance, efficiency, size, and cost across end markets.
Increasing Complexity and Cost of Designing Leading-Edge Solutions
The resources required to develop leading-edge products are significant and continue to increase exponentially as manufacturing process nodes shrink. According to the International Business Strategy, Inc. (“IBS”), IC design costs were approximately $249 million for a 7nm chip and approximately $725 million for a 2nm chip, representing approximately a three-times increase in design cost as compared to a 7nm chip. Design partners play an increasingly valuable role in the chip design process by providing specialized capabilities and expertise that enable semiconductor suppliers to focus on their core product differentiation, while keeping pace with market innovation. Design partners facilitate innovation and enhance customers’ competitive positioning by reducing the complexity, risk, and cost of a significant part of the development cycle. For example, to design a 2nm chip, IBS estimates that the software development, verification, and IP qualification is 71% of the overall cost. In addition, design partners, like Arm, that can demonstrate a deep understanding of their customers’ workloads are better positioned to integrate themselves into their customers’ workflows, further expanding their value proposition over time.
Growth of In-House Development and Custom Silicon Chips
Many OEMs today utilize “off-the-shelf,” or “merchant,” semiconductors when building their product offerings. However, this approach can introduce compromises. For example, an OEM may use a chip that includes features that are irrelevant for its use case, at the expense of performance and cost efficiency. Similarly, an OEM may need a chip that incorporates features not otherwise available from a merchant supplier. As a result, leading OEMs are increasingly looking to build custom chips in-house that deliver greater performance and greater efficiency at an equal or better price for a particular use case. The success of Arm-based products such as Amazon’s Graviton, deployed across Amazon data centers globally, have demonstrated the opportunity to create a sustainable competitive advantage through this approach. For example, Amazon claims that Graviton delivers up to 40% better price performance over comparable x86-based systems. This trend of increasing use of in-house developed solutions has significantly expanded the opportunity for Arm.
Our Solution
We provide the most pervasive CPU architecture in the world. The key elements of our solution include:
We continue to expand the scope of our product offerings, investing in more holistic, end-market optimized designs, expanding beyond individual design IP to providing subsystem designs. Given the complexities of developing chips using the most advanced manufacturing processes, we are making significant investments to better support the increasing number of OEMs looking to develop their own customized chips.
In addition, we have cultivated a broad ecosystem of third-party hardware and software partners to support our customers. Our partners include leading semiconductor technology suppliers, including foundries (such as GlobalFoundries Inc., Intel’s Foundry Services business, Taiwan Semiconductor Manufacturing Company Limited and United Microelectronics Corporation) and EDA vendors (such as Cadence Design Systems, Inc., Synopsys, Inc. and Siemens). We also invest in our software ecosystem and work closely with firmware and operating system vendors (such as Amazon Linux, Canonical Ltd., Google LLC, Microsoft, Red Hat, Inc., VMware, Inc. and Wind River Systems, Inc.), game engine vendors (such as Unity and Epic Games), software tool providers (such as Green Hills Software LLC, IAR Systems AB and Lauterbach GmbH), and application software developers (such as Adobe Inc., EA, King.com Ltd. and Microsoft).
Our solution, combined with the breadth of our software ecosystem and the millions of chip design engineers and software developers that utilize it, has created a virtuous cycle of adoption, which means that software developers write software for Arm-based devices because it offers the biggest market for their products, and chip designers choose Arm processors because they have the broadest support of software applications.
We believe that the primary customer benefits of our solution include:
Our Market Opportunity
We define our total addressable market (“TAM”) to include all chips that can contain a processor and, therefore, our TAM includes the main controller chips in smartphones, PCs, digital TVs, servers, vehicles and networking equipment. Our TAM excludes chips that are unlikely to contain a processor, such as memory and analog chips.
For the calendar year ended December 31, 2022, we estimate that our TAM was approximately $202.5 billion and we forecast that our TAM will grow at a 6.8% compound annual growth rate (“CAGR”) to approximately $246.6 billion by the end of the calendar year ending December 31, 2025. We estimate that the aggregate value of chips containing Arm technology was approximately $98.9 billion in the calendar year ended December 31, 2022, representing an approximate 48.9% market share as compared to an approximate 42.3% market share as of December 31, 2020. We estimate that our royalty revenue as of December 31, 2022 represented approximately 1.7% of the industry TAM containing Arm-based chips. We expect that the cost and complexity of chip design will continue to increase, and that we will be able to contribute a greater proportion of the technology included in each chip, resulting in our royalties comprising a greater proportion of each chip’s total value. Our calculation of TAM is based on a combination of third-party sources, customer reports and our own internal assessments and judgment.
Mobile Applications Processor
The mobile applications processor is the primary chip in a smartphone, and runs the operating system and applications in addition to controlling many of the device functions, including gaming, music, video, and any other applications. While high compute performance is required for today’s applications, processors also must be highly energy efficient so that the smartphone’s battery will last all day without needing to be recharged. We expect the mobile applications processor market to grow from approximately $29.9 billion in the calendar year ended December 31, 2022 to approximately $36.0 billion in the calendar year ending December 31, 2025, representing a CAGR of 6.4% over that period. We have maintained market share in the mobile applications processor market of greater than 99% for many years, by virtue of all key mobile operating systems depending on Arm processors.
We expect the value of the market for mobile applications processors to continue to grow, particularly in light of several smartphone usage trends that are increasing the need for high-performance processing capabilities, including the shift to 5G, growth in mobile gaming, and emergence of AI and ML workloads.
Other Mobile Chips
Mobile phones contain many chips beyond the main applications processor, including the modem, Wi-Fi, Bluetooth and NFC connectivity chips, GPS chips, touchscreen controllers, power management chips, camera chips, audio chips and more, which we refer to collectively as the “other mobile chips market.” We expect the other mobile chips market to remain relatively flat at approximately $17.6 billion in the calendar year ended December 31, 2022 and approximately $17.5 billion in the calendar year ending December 31, 2025, representing a CAGR of (0.2)% over that period.
Consumer Electronics
CE includes products found in the home, such as digital TVs, tablets, laptops, extended reality (“XR”) headsets and wearables. The market share of Arm-based chips in consumer electronics is increasing as new product categories, such as smart speakers, XR headsets and laptops, adopt Arm products to achieve high performance without sacrificing efficiency. We expect the CE chip market to grow from approximately $46.9 billion in the calendar year ended December 31, 2022 to approximately $53.2 billion in the calendar year ending December 31, 2025, representing a CAGR of 4.3% over that period.