ARM HOLDINGS PLC /UK

Arm Holdings plc operates in the semiconductor industry, which is characterized by volatility, intense competition, declining average selling prices (ASPs) over the life of a generation of chips, and rapid changes in design and manufacturing technologies, end-user requirements, industry standards, and frequent new product introductions and improvements ⁸. The company's success is largely dependent on the semiconductor and electronics industries, and the demand for products from its customers and their customers ⁸. Arm architects, develops, and licenses its high-performance and energy-efficient Arm compute platform, with CPU products addressing diverse requirements for performance, power, and size, complemented by GPU and NPU accelerators, interconnect, and other offerings ⁵⁷.

The market for Arm's products is intensely competitive, facing challenges from established technologies like the x86 architecture and free, open-source technologies such as RISC-V ⁹. Many of Arm's customers are also major supporters of the RISC-V architecture ⁹. Competitors, including some semiconductor customers, are major corporations with substantially greater technical, financial, and marketing resources and name recognition ⁹. Arm's competitive strengths include its technology leadership across markets, with its compute platform being the most widely deployed architecture globally, used in virtually all smartphones and a majority of tablets and digital TVs ⁶². The company also highlights its leadership in AI from the edge to the cloud, its flexible and customizable compute platform, an extensive ecosystem of third-party software and hardware partners, close integration with customers and ecosystem partners, long-term visibility enabling investment in future products, and its ability to satisfy customer processor design needs in a mutually beneficial way ⁶².

Arm's core business model involves licensing its products to semiconductor companies, OEMs, and other organizations for a fee, granting them access to designs to create Arm-based chips ⁶⁰. Once a chip is designed and manufactured with Arm's products, the company receives a per-unit royalty on substantially all chips shipped ⁶⁰. This royalty is typically based on a percentage of the chip's ASP or a fixed fee per unit, increasing as more Arm products are included in the chip ⁶⁰. This model contributes to a long tail of recurring royalty revenues, as each chip may ship for many years and Arm compute platforms can be reused ⁶⁰. Primary customer segments include semiconductor companies and OEMs across various end markets ⁶⁰.

Arm's product offerings are built upon its CPU products, which leverage a common scalable architecture to address diverse performance, power, and cost requirements ⁵⁸. Other design offerings include Accelerators (GPU and NPU products), System IP (complementary design components for high-performance, power-efficient, reliable, and secure chips), and Compute Platform Products (pre-integrated and pre-verified configurations of Arm technology like CSSs) ⁵⁸. Development Tools and Software also support the development and deployment of these offerings ⁵⁸. The company is expanding its product scope to more holistic, end-market optimized designs, moving beyond individual design IP to subsystem designs ⁵⁹.

For the fiscal year ended March 31, 2025, total revenue increased by $774 million ¹, or 24% ², to $4,007 million ³ from $3,233 million ⁴ in the prior fiscal year ⁷². License and other revenue increased by $408 million ⁵, or 29% ⁶, driven by new licensing agreements, increased revenue from prior arrangements, and renewals ⁷². Royalty revenue increased by $366 million ⁷, or 20% ⁸, due to higher chip shipments and an improved mix of products with higher royalty rates per chip ⁷². Gross profit was $3,886 million ⁹, representing a gross margin of 97% ¹⁰ for the fiscal year ended March 31, 2025 ⁷². Operating income was $831 million ¹¹, resulting in an operating margin of 21% ^{12 72}. Net income for the fiscal year ended March 31, 2025, was $792 million ¹³, with diluted EPS of $0.75 ¹⁴ (calculated from 1,056,513,738 shares outstanding as of March 31, 2025, and net income of $792 million). Cash and cash equivalents stood at $2,085 million ¹⁵ as of March 31, 2025 ⁷⁵. The company does not currently have any debt ²⁵.

Comparing fiscal year 2025 to 2024, total revenue increased by $774 million ¹⁶, or 24% ¹⁷. License and other revenue grew by 29% ¹⁸, while royalty revenue increased by 20% ^{19 72}. Revenue from external customers increased by $675 million ²⁰, or 27% ²¹, and revenue from related parties increased by $99 million ²², or 14% ^{23 72}. Cost of sales decreased by $33 million ²⁴, or 21% ²⁵, primarily due to decreases in activities associated with professional and design services and share-based compensation costs ⁷³. Research and development expenses increased by $92 million ²⁶, or 5% ²⁷, driven by investments in next-generation products, headcount growth, and higher engineering expenses, partially offset by decreases in share-based compensation ⁷³. Selling, general and administrative expenses remained relatively flat ⁷³. Loss from equity investments, net, increased by $217 million ²⁸, or 1085% ²⁹, primarily due to a $246.4 million ³⁰ fair value loss on the investment in Ampere Computing Holdings LLC ⁷⁴. Interest income, net, increased by $6 million ³¹, or 5% ³², due to higher cash equivalents and favorable interest rate yields ⁷⁴. The effective tax rate decreased primarily due to the tax benefit of windfall gains and research tax credits from an increase in share price ⁷⁴.

During the fiscal year ended March 31, 2025, Arm introduced a compute subsystem (CSS) targeted at customers in the infrastructure space on February 21, 2024 ¹⁰. The company also completed a corporate reorganization in September 2023, where Arm Limited became a wholly owned subsidiary of Arm Holdings plc ⁵⁶. The IPO was completed on September 18, 2023, with one shareholder selling 102,500,000 ADSs ³³ at $51 per share ³⁴, and Arm did not receive any proceeds from this sale ⁵⁶. In December 2023, Arm terminated an agreement with Arm China for certain software engineering-related services, bringing them in-house, with contract termination costs included in disposal, restructuring and other operating expenses ⁶⁹.

Management has not provided specific revenue, margin, or EPS guidance for the upcoming period in this filing.

Arm is currently focused on growing its business in key areas such as cloud computing, automotive, IoT, AI, and 5G ¹². The company is actively considering the impact of next-generation technology, allocating resources to and exploring new markets and different products and solutions for existing and prospective customers ¹⁰. This includes new products in its IP portfolio, as well as solutions beyond individual IP designs such as RTL-based CSSs, GDSII-based CSSs, chiplets, and complete end chip solutions ¹⁰. For example, Arm introduced a CSS targeted at customers in the infrastructure space on February 21, 2024 ¹⁰. The company has been, and may in the future be, engaged to advise on or design chips for certain existing customers and other third parties, including affiliates of SoftBank Group, across a variety of use cases and end markets ¹⁰. Arm believes its investments in higher performance, higher efficiency, and more specialized designs will drive greater demand for its products and higher value for its customers, which is expected to result in higher royalty fees ⁷⁷. The company's future performance is dependent on its continued ability to provide value to customers and to drive additional value through technological innovation ⁷⁷.

Arm intends to continue allocating resources to, and exploring, new markets and/or different products and solutions for existing and prospective customers in various end markets ⁷⁹. This includes recruiting and hiring engineers or other employees with the requisite expertise, and exploring potential acquisitions of, or service agreements with, businesses employing the required expertise ⁶⁹. The company has substantially increased its research and development investment to focus on long-term returns and to replicate its strong position in smartphones in other markets, such as automotive, networking equipment, cloud compute, and industrial IoT ⁶⁹. Each generation of processor is typically more advanced and complex, requiring increased development efforts, which may be partially offset by productivity improvements ⁶⁹. Consequently, Arm increases its research and development investment annually in line with the increased development needs of the next generation of products ⁶⁹.

Arm has lease payment obligations of $452 million ³⁵ as of March 31, 2025, with $38 million ³⁶ payable within 12 months ⁷⁵. The company also had seven leases signed but not yet commenced, with an aggregate lease value of approximately $49 million ³⁷ and lease terms expiring through 2036 ⁷⁵. Non-cancelable purchase obligations for cloud computing web services, data centers, software, licenses, and services amounted to approximately $912 million ³⁸ as of March 31, 2025, with remaining terms of 12 months or longer through 2035 ⁷⁵. Arm intends to continue to finance its operations primarily through cash generated from business operations, partially supported by government research grants and tax credits ⁷⁵. For the fiscal year ended March 31, 2025, government research grant and tax credits benefits recognized were $146 million ^{39 75}.

The company's operating and financial performance is dependent, in part, upon maintaining its market share in the smartphone and consumer electronics markets and maintaining or growing market share in its other target markets ⁷⁷. New AI hardware, the rise of AI agents, and the emergence of smaller, lighter language models are unlocking edge AI use cases in the smartphone, PC, automotive, and industrial end markets ⁶². Cloud demand for AI compute is lifting industry demand for GPUs, with a rising percentage based on the Arm compute platform ⁶². Arm CPUs run AI workloads in billions of devices from the edge to the cloud, and the CPU is vital in all AI systems ⁵⁷. In the latest Arm architecture, CPUs and GPUs, new functionality and instructions have been added to accelerate future AI algorithms and workloads ⁵⁷.

Arm faces several material risks, including its dependence on the volatile semiconductor and electronics industries, where demand for its products is tied to customer product acceptance and compatibility with design and manufacturing processes ⁸. Intense competition from established technologies like x86 and open-source alternatives such as RISC-V, supported by some of Arm's customers, could lead to market share loss ⁹. The development of more integrated compute products like CSS, chiplets, and complete end chip solutions may introduce new competitive, technological, and financial risks ¹⁰. Competitive pressures may necessitate price reductions or changes to business terms, adversely affecting financial results ¹¹. Failure to adequately fund research and development efforts, which increased by $92 million ⁴⁰ or 5% ⁴¹ in fiscal year 2025, could impair competitiveness [11, 73]. A significant portion of total revenue, approximately 56% ⁴² for fiscal year 2025, comes from a limited number of customers, with Arm China alone accounting for approximately 17% ⁴³, exposing the company to greater risks from adverse developments affecting these key customers [15, 64]. Revenue concentration in the PRC market, which accounted for approximately 19% ⁴⁴ of total revenue in fiscal year 2025, makes Arm susceptible to economic and political risks, exacerbated by trade tensions between the U.S., U.K., and PRC [17, 64]. The commercial relationship with Arm China is critical, but Arm does not control its operations, exposing it to risks related to Arm China's business results, compliance, talent retention, and financial reporting accuracy [18, 19]. Global economic conditions, including rising inflation and interest rates, supply chain disruptions, and geopolitical events like the war in Ukraine and conflicts in the Middle East, can materially affect operating results and demand for products [20, 21]. The semiconductor industry's reliance on a limited number of manufacturers concentrated in certain geographic regions, particularly Taiwan, poses risks from adverse developments in these regions ²². Errors, defects, bugs, or security vulnerabilities in Arm's products, or those of third-party suppliers and open-source vendors, could expose the company to liability and damage its brand and reputation ²⁹. Actual or perceived security vulnerabilities in information technology systems, including cyberattacks, could harm reputation and operating results ³⁰. Foreign exchange fluctuations, despite hedging, could adversely affect financial results, as less than 2% ⁴⁵ of total revenue is denominated in currencies other than USD, while some costs are in British pounds sterling, Euro, and Chinese Yuan Renminbi [31, 73].

Management's message emphasizes Arm's role as a global leader in the semiconductor industry, architecting, developing, and licensing high-performance and energy-efficient compute platforms that are indispensable to everyday life and leveraged to the growth in AI workloads ⁵⁷. The company highlights its flexible business model, which includes various licensing agreements and per-unit royalties, enabling a wide range of customers to access Arm products and contributing to long-term recurring royalty revenues ⁶⁰. Management's strategic priorities include continued innovation and development of new products and services, such as more complete compute subsystems (CSS), chiplets, and complete end chip solutions, to meet evolving market demands and expand into new growth areas like cloud computing, automotive, IoT, AI, and 5G [10, 12, 69]. They intend to continue allocating significant resources to research and development, including recruiting and hiring engineers or acquiring companies with requisite expertise, to maintain or increase market share and create value for customers ⁶⁹. Management also acknowledges the importance of maintaining market share in established areas like smartphones and consumer electronics while growing in new target markets ⁷⁷. For the fiscal year ending March 31, 2026, the CEO's base salary will remain at $1,350,000 ⁴⁶, with a target annual bonus of 125% ⁴⁷ of salary, potentially reaching 187.5% ⁴⁸ for maximum performance based on Revenue (50% ⁴⁹ weighting) and Non-GAAP Operating Income (50% ⁵⁰ weighting) ⁹⁰. A PSU award with an initial target value of 14 times ⁵¹ base salary will be granted to the CEO, with a maximum opportunity of 125% ⁵² of the grant ⁹¹.