MARCH 16, 2011 THE WALL STREET JOURNAL
By LILLY VITOROVICH
LONDON—ARM Holdings PLC is looking to generate greater royalties from its higher-end chip designs and increase its market share in digital television in the years to come, although the smartphone revolution will continue to be a key growth driver in the shorter term, Chief Executive Warren East said Tuesday.
The U.K.-based microchip designer generates profits from royalties on its chip designs, which are set at around 1%. But it has started collecting royalties of 1.5% to 2% on its higher-end designs for its most recently developed and licensed processors. While the higher-end chip designs, such as its Cortex-A family, accounted for just 3% of total shipments last year, the company expects volumes to increase to 10% in five years, Chief Financial Officer Tim Score said in an interview alongside Mr. East.
ARM also wants to grow its market share in digital TV to more than 60% "over the next several years" from around 35% at present, Mr. East said.
"Over the next few years, things like digital TVs, hard disk drives, microcontrollers, that's a market which really is about execution. We've done quite a lot of the development work, we rely on our semiconductor partners to take us into those markets, and we need to work with them and keep them enabled," he said.
ARM expects the microcontroller market to grow to around nine billion units by 2015 from five billion units last year. Mr. East said the microcontroller market will benefit from an increased awareness of the need to cut energy consumption. He said the devices can be used in products such as motor control, adding that electric motors can be twice as efficient with intelligent controls.
In the longer term, Mr. East said the company is also looking at data centers and the server market, although it currently has no software infrastructure for the server market, which is dominated by its larger rival Intel Corp. Mr. East said entering the server market is a long-term proposition that wouldn't generate revenue until 2014 or 2015 but if ARM's technology can halve energy consumption then consumers will want to switch to ARM-designed chips.
For the immediate future though, ARM expects smartphones to continue to be a major growth driver for the company. Industry players expect the smartphone market to grow by around 40% this year, Mr. East said. Mr. Score added that it is "still early in the smartphone wave," as smartphones currently account for less than a third of all mobile phones, a figure that is expected to exceed 50% in five years.
Six billion units of ARM-based chips were in the marketplace last year, a figure which is expected to rise to between seven billion and eight billion units in 2011, Mr. Score said.
ARM, whose microchip blueprints can be found in most mobile phones, including Apple Inc.'s blockbuster iPhone, also expects to benefit from the inclusion of its chip designs in tablets, such as Apple's iPad, although Mr. East said the tablet market is dwarfed by the smartphone market.
While the stronghold that Apple's iPad has on the tablet market is expected to continue this year, Mr. East said Google's Android platform will prove to be a "serious challenger to the iPad" in coming years.
Mr. Score said that ARM hedges against the U.S. dollar on a rolling one-to-two quarter basis because around 95% of the company's revenue and half its costs are in dollars. If the pound is trading around $1.60 "life is fine," if it moves to around $1.40 the group will "get a boost," but if it goes to $1.80 to $2 than it will hurt the company, he said.
Mr. Score wouldn't comment directly on persistent takeover rumors, but noted that ARM's business model works best as an independent company.