SoftBank Chip Unit Arm Files for an IPO Likely to Be 2023’s Biggest
Arm projects future market growth as profit drops in recent quarter
Arm Ltd., the British company whose circuit designs lie inside billions of electronic devices, said profit fell by more than 50% in the most recent quarter in filings that kicked off what is expected to be the biggest initial public offering of the year.
Arm raised lofty expectations for its business overall but faces near-term market challenges. Sales of smartphones—a core market for Arm’s circuit designs—have slowed in recent quarters, including a 7.8% decline in the second quarter, according to International Data Corporation. The company reported $675 million of revenue in its latest quarter, ended in June, down from $692 million the year prior. It reported that net income more than halved to $105 million in the quarter.
Arm is one of the world’s most important semiconductor businesses, serving companies such as Apple, Qualcomm and Advanced Micro Devices AMD 2.63%increase; green up pointing triangle, which rely on it for some of their chips. Arm has served as a neutral party to the chip industry—offering its designs to everyone without favoring any one company.
The market Arm is targeting—chips that contain processors and go into smartphones, personal computers, televisions, servers, cars and networking equipment—should grow by nearly 7% a year to reach around $247 billion by the end of 2025, the company said in a filing with the Securities and Exchange Commission.
Arm’s revenue represents a small sliver of that total today, but the company said it expected the cost and complexity of chip design would increase, “resulting in our royalties comprising a greater proportion of each chip’s total value.”
The listing, set to take place next month on Nasdaq after meetings with investors, will test a nascent rebound in appetite for IPOs following many quiet months fueled by concern about inflation, stock prices and economic growth.
SoftBank confirmed in the filing that in August it acquired a 25% stake in Arm that was held by the Japanese technology investor’s Vision Fund unit for $16.1 billion. That deal, previously reported by The Wall Street Journal, implied a total valuation for Arm of around $64 billion. But SoftBank cautioned investors in the filing that the purchase price “may not be indicative of, and is not intended to reflect, expectations” of the value of Arm following the IPO.
Demand for PCs and smartphones that skyrocketed during the pandemic has tailed off in recent quarters, putting pressure on the chip industry. Nonetheless, executives and analysts expect a long-term surge in demand for data and computing power to lift chip sales to new heights in the coming decade.
SoftBank is planning to list a minority stake in Arm, roughly 10% of it, people familiar with the matter have said, with SoftBank retaining the rest. All of the proceeds from the IPO will go to SoftBank, Arm’s filing said.
Arm’s circuit designs and basic chip architecture, which the company sells to chip makers to incorporate into finished chips, have become ubiquitous in smartphones over the past two decades.
The company has extended its footprint into other, more powerful chips in recent years and is getting an added boost from recent excitement about artificial intelligence, which could bring new sales opportunities. More than 30 billion Arm-based chips were shipped in the company’s last fiscal year, up 70% from seven years ago, the company said in its SEC filing.
Chip maker Nvidia became one of a handful of companies valued at more than $1 trillion earlier this year on the strength of its chips’ use in creating powerful generative AI tools such as OpenAI’s ChatGPT. Nvidia, which tried to acquire Arm for $40 billion three years ago, is using Arm’s circuits in some of its most powerful coming AI chips.
Arm said in its SEC filing that chips based on its technology were already doing AI work on billions of devices including smartphones, cameras and cars. There will be a heightened focus in the future on doing that work faster and using lower power.
The Arm offering, because of its large size, will be closely watched by investors as further proof of whether the recent revival in the IPO market is sustainable. It will follow the successful but smaller issues in June by restaurant chain Cava Group and in July by Oddity Tech, a direct-to-consumer seller of makeup brands.
Other big IPOs expected before year’s end include grocery-delivery company Instacart and shoe maker Birkenstock.
Arm’s heavy exposure to the Chinese market risks drawing investor scrutiny to the IPO because of the mistrust between the U.S. and its rival superpower. The company said in its SEC filing that about 25% of its revenue came from China in its latest fiscal year, which made it “particularly susceptible to economic and political risks” affecting that country. Arm expects declining royalty revenue from China, it said, adding that such revenue already has been slowing because of economic issues and export controls imposed on the country.
China demonstrated its ability to intervene in the development of the U.S. chip industry last week, after Chinese regulators failed to approve Intel’s more-than-$5 billion offer to buy Israeli contract chip maker Tower Semiconductor. That inaction led the two companies to abandon their deal.
Arm also said its top five customers accounted for about 57% of revenue in its last fiscal year, which made it “particularly susceptible” to any industry slowdown, changes in trade protection and other government policies, or adverse developments that might hurt demand for the company’s designs.
The IPO will mark the second time Arm has gone public. The company listed shares in New York and London in 1998, as its circuitry gained a foothold in the burgeoning cellphone-chip market. It stayed publicly traded until SoftBank bought it in 2016.