Investors familiar with the semiconductor industry know that ARM Holdings (NASDAQ:ARMH) designs key intellectual property such as processor and graphics cores that are at the heart of many of the mobile devices in the market today.
The company doesn't actually make chips based on these designs, though. Instead, the company licenses the intellectual property to chipmakers who then incorporate ARM's designs into full chip designs. ARM usually collects an upfront licensing fee and subsequent royalty payments for each chip sold.
The royalty amount is usually dependent on how "rich" the ARM content inside of a particular licensee's chip is. A chip that uses two low-end ARM cores and no ARM-designed graphics processor is probably going to command a lower royalty rate than a chip with eight ARM cores in big.LITTLE as well as a huge ARM designed graphics processor.
In this article, I'd like to go over three ways that ARM is expanding its royalty opportunity in the mobile market.
Continued proliferation of ARMv8
It has been well-known for a while that processors implementing ARM's latest ARMv8 architecture -- that is, ARM's 64-bit instruction set which first made its debut in the consumer market with the Apple (NASDAQ:AAPL) A7 chip -- command higher royalties than chips based on the older ARMv7 architecture.
A not-so-insignificant part of the ARM bull case over the last couple of years has been the royalty rate boost that ARM would see as the smartphone market transitioned away from ARMv7 toward ARMv8. Although analysts with Northland Securities recently described this shift from ARMv7 to ARMv8 is "approaching saturation," I think there's still a lot of runway left here.
Indeed, according to ARM's most recent analyst day presentation, ARMv8 penetration will reach 50% of smartphones by the end of 2015. One could view this as "approaching saturation" (glass half empty) but I still see 50% of a growing phone market that hasn't transitioned (glass half full).
Increasing graphics/media share
Although ARM is known for its CPU cores, it has been investing heavily in mobile graphics cores and multimedia engines. Traditionally, Imagination Technologies (NASDAQOTH: IGNMF) has been known for its leadership position in mobile graphics (if not in raw unit share, in technological prowess), but ARM's designs are becoming increasingly robust and competitive.
For example, smartphone giant Samsung (NASDAQOTH: SSNLF) has used ARM's graphics solutions for multiple generations of chips now, including the Exynos 5433, Exynos 7420, and in the upcoming Exynos 8890. Huawei's HiSilicon division, too, seems to favor ARM graphics as well.
Beyond the vertically integrated device vendor and chip vendors, ARM graphics have seen success in the merchant market as well. MediaTek uses ARM graphics IP fairly extensively (though not exclusively) and the company's latest Helio X20 high-end mobile chip will include ARM graphics (moving from Imagination graphics in the prior generation X10 chip).
ARM's graphics investments are clearly starting to pay off nicely.
Physical IP solutions
Finally, ARM has been investing in developing physical IP solutions to help system-on-chip designers more quickly and effectively implement their designs. According to ARM's most recent roadshow presentation, ARM will see increased royalty rates from physical IP targeted at the 14/16-nanometer FinFET manufacturing nodes, which bodes well for ARM as the industry transitions broadly to these technologies in the coming year.