The chip company that dares to battle Intel
Posted by Jon Fortt, senior writer
July 16, 2009 11:00 AM
Warren East, chief executive of ARM, holds up an HTC Touch Diamond2
It’s 9:30 A.M. on a Friday in Cambridge, England, and ARM CEO Warren East looks annoyed. Bloomberg has just reported that UBS has downgraded his company’s stock to a sell. The news is plausible, since ARM (which used to stand for Advanced RISC Machine) depends on the troubled cellphone market. But it turns out that Bloomberg simply got the wrong ARM. “They confused us with a South African mining company” — African Rainbow Materials — East explains.
This sort of thing happens all the time to ARM (ARMH), a microchip designer with $546 million in revenue last year. Nestled in this leafy college town an hour from London — and 5,000 miles from Silicon Valley — it’s easy to overlook. But ARM may be the most important technology company no one has heard of. Its low-power chip designs serve as the brains of 98% of the world’s cellphones. And the company’s technology can be found in myriad other gadgets and devices, including digital TVs, iPods, videogames, video recorders, and even Pleo robotic dinosaurs.
ARM draws basic blueprints; essentially the company designs the core of the chip. Chipmakers such as Qualcomm (QCOM), Texas Instruments (TXN), Samsung, and many others license those designs and then customize them, sending ARM a small royalty — usually a few cents — for every gadget that rolls off the assembly line. “I don’t think they’ve ever lost sight of who their customers are, what their business is,” says Michael Rayfield, general manager of the mobile business at Nvidia, the graphics-chip maker. “ARM has done a nice job of maintaining leadership in the ultra-low-power [chip design] that is necessary for cellphones.”
As cellphone sales, which represent more than half of ARM’s revenues, have plateaued in recent years, the company’s financial growth has slowed. Revenue grew 78% from 2004 to 2006, for example, but only 6% last year. Profits, at $120 million in 2008, have followed a similar trajectory. (ARM’s profit margins, 21%, are slightly higher than those of its peers.) The flattening growth helps explain why ARM’s shares are trading at only half of what they were two years ago.
But ARM is at the center of a crucial technological shift. The lines between phones and computers are blurring as devices like iPhones and BlackBerrys, which use ARM designs, offer everything from e-mail and web surfing to movies and spreadsheets. These days the most popular services — Facebook, YouTube, iTunes , Google — no longer require being tethered to a PC. With traditional computers beginning to lose their primacy, competition in chips for smartphones and other non-PC devices is intensifying.
For ARM it means facing off against a ferocious new competitor: Intel (INTC). The chip titan has declared its ambition to conquer cellphones and other gadgets the way it did personal computers, and steamroll ARM in the process. For its part, ARM is trying to expand by entering a nascent market in which Intel already has an advantage: netbooks, the mini-computers designed mostly for e-mail and web browsing. East thinks his corporate David can prevail over the chip Goliath. As he puts it, “ARM is 1,750 people, but we punch way above our weight.”
An organist in his local church, East, 47, is mild-mannered but capable of the occasional brash proclamation. He acknowledges that Intel is a brilliant competitor and a matchless manufacturer. But, as he puts it, “Intel’s got an old-fashioned business model. ARM’s got a 21st-century business model.”
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From Irish Secure