Arm Holdings Revenue Breakdown By Segment – License And Royalty

Microchips. Pexels Images.

ARM Holdings is a British multinational semiconductor and software design company. It is renowned for its ARM architecture, a family of Reduced Instruction Set Computing (RISC) architectures for computer processors.

ARM doesn’t manufacture chips; instead, it licenses its intellectual property (IP) to other companies, who then incorporate ARM’s designs into their products.

This business model has made ARM’s architecture prevalent in a wide range of products, from smartphones and tablets to a growing number of embedded systems and Internet of Things (IoT) devices.

ARM’s energy-efficient processor designs are particularly well-suited for applications where power consumption is critical.

This article looks at ARM’s revenue breakdown by segment. For your information, ARM derives its revenue from only 2 segments, which are licensing and royalty.

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Investors interested in ARM Holdings’ revenue by country may find more information on this page: Arm Holdings revenue by country.

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Definitions

To help readers understand the content better, the following terms and glossaries have been provided.

License And Other Revenue: License and other revenue include revenue from licensing, software development tools, design services, training, support, and all other fees that do not constitute royalty revenue.

ARM Holdings generates its license revenue by allowing other companies to use its intellectual property, specifically its ARM architecture for processors, in exchange for a fee.

Instead of manufacturing and selling chips, ARM licenses its chip designs and related technology to semiconductor companies that incorporate these designs into their products.

The licensing revenue comes in two primary forms: upfront licensing fees when a company agrees to use ARM’s technology and royalties based on the number of units sold that incorporate ARM’s designs.

Licensing fees are typically one-time payments when a company agrees to use ARM’s technology.

Royalty Revenue: ARM Holdings’ royalty revenue is generated from the sales of products that incorporate ARM’s intellectual property, specifically its ARM architecture for processors.

Companies that license ARM’s technology agree to pay royalties based on the number of units sold, including ARM’s designs. This means that after an initial licensing agreement, ARM continues to earn income from every product sold by its licensees that uses ARM’s chip designs.

As mentioned, licensing fees are typically one-time payments. In contrast, royalty payments are ongoing and paid on each unit sold, including ARM’s designs.

This revenue model leverages the widespread adoption of ARM’s architecture across various electronic devices, such as smartphones, tablets, and embedded systems, allowing ARM to benefit financially from the extensive use of its technology in the market.

As a result, ARM will have a continuous revenue stream as long as its IPs are embedded in its customers’ products.

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How Is ARM Holdings Growing So Fast?

ARM Holdings’ rapid growth can be attributed to several key factors:

1. **Licensing Model**: ARM’s unique business model, which licenses its intellectual property rather than manufacturing chips, has allowed for widespread adoption of its technology. By licensing its ARM architecture to many semiconductor companies, ARM has enabled its designs to be used in various products. This approach minimizes its operational risks and investments in manufacturing facilities while maximizing its reach and influence in the semiconductor industry.

2. **Energy-Efficient Design**: The ARM architecture is known for being highly energy-efficient, which makes it particularly appealing for mobile and embedded applications where power consumption is a critical consideration. In an era where battery life is a significant factor for consumer electronics like smartphones, tablets, and IoT devices, ARM’s energy-efficient processors are in high demand.

3. **Wide Adoption Across Industries**: ARM’s technology is not limited to just one electronics market segment. Its architectures are used in various products, from consumer electronics like smartphones and tablets to embedded systems and IoT devices. This diversity in application areas ensures a steady and growing demand for ARM’s intellectual property.

4. **Royalty Revenue Model**: ARM’s revenue model, which includes upfront licensing fees and royalties on each unit sold containing its technology, ensures a continuous income stream. As the adoption of ARM architecture expands and more units are sold, ARM benefits financially from both initial agreements and the ongoing sale of products by its licensees.

5. **Innovation and Development**: ARM continually invests in research and development to enhance its architectures and introduce new technologies. This commitment to innovation ensures that ARM remains at the forefront of semiconductor design, meeting the evolving needs of the industry and maintaining its competitive edge.

These strategic factors combined have propelled ARM Holdings to grow rapidly and secure its position as a dominant force in the global semiconductor industry.

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Total Revenue

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ARM Holdings’ total revenue increased $554 million, or 21%, to $3,233 million during the fiscal year ended March 31, 2024, from total revenue of $2,679 million during the fiscal year ended March 31, 2023.

ARM’s significant rise in total revenue was driven primarily by the increase in licensing revenue, due mainly to the rise in new licensing agreements, an increase in revenue from arrangements entered into in prior periods, and renewals of existing license arrangements by customers to gain access to the latest versions of ARM’s technology IP.

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License And Royalty Revenue

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The definition of ARM’s license and royalty revenue is available here: license revenue and royalty revenue.

ARM’s license and other revenue increased $427 million, or 43%, during the fiscal year ended March 31, 2024 as compared to the fiscal year ended March 31, 2023.

On the other hand, ARM’s royalty revenue increased $127 million, or 8%, during the fiscal year ended March 31, 2024 as compared to the fiscal year ended March 31, 2023, driven primarily by the semiconductor industry recovery in the second half of the year.

Among the 2 types of revenue, ARM’s license revenue increased the most, by 43% year-over-year, while royalty revenue increased just 8% in the same period.

However, ARM’s royalty revenue is much higher than license revenue in all fiscal year and may possibly be more important than license revenue, as royalty income provides continuous revenue streams to the company.

Understandably, once a company licenses ARM’s technology, every product it sells that incorporates ARM’s designs generates royalty payments.

Given the enormous volume of electronics produced and sold globally, the cumulative royalty payments can increase significantly overtime and can surpass the initial licensing fees.

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License And Royalty Revenue In Percentage

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The definition of ARM’s license and royalty revenue is available here: license revenue and royalty revenue.

ARM Holdings’ royalty revenue accounts for a much significant portion of its total revenue. The ratio reached 55.7% in fiscal year 2024 versus 62.5% in fiscal year 2023.

On the other hand, ARM’s license revenue made up 44.3% of its total revenue in fiscal year 2024 compared to 37.5% in fiscal year 2023.

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YoY Growth Rates Of License And Royalty Revenue

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The definition of ARM’s license and royalty revenue is available here: license revenue and royalty revenue.

ARM’s overall revenue increased significantly in fiscal year 2024, with total revenue rising by over 20%, while license revenue grew 42.5% and royalty revenue jumped 7.6% year-over-year.

On the other hand, ARM’s overall revenue decreased by 0.9% in fiscal year 2023, with license revenue tumbling 12%, while royalty revenue jumped 7.2%.

A significant trend worth noting is that ARM’s royalty revenue has always been increasing no matter what happens to its licensing revenue.

For example, in fiscal year 2023, despite the decrease in ARM’s licensing revenue by 12%, its royalty revenue still climbed 7%, illustrating the resilience nature of the company royalty income.

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Conclusion

ARM Holdings gets the majority of its revenue from royalty income, with the contribution topping 59% on average between fiscal year 2022 and 2024.

On the other hand, ARM’s license revenue makes up only about 41% of its total revenue on average over the last three years.

While ARM’s license revenue has grown the most on average, its royalty revenue has been the most resilience, as it still expanded by 7% in fiscal year 2023 although the license revenue decreased by 12%.

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References and Credits

1. All financial figures presented in this article were obtained and referenced from ARM’s 12-F reports and earnings releases which are available in ARM Financial Reports.

2. Pexels Images.

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