Afew years ago a friend of mine tipped a little-known chip designer called ARM Holdings. He said it was going to be the next big thing. A year later, after its shares had shot up, he cursed his luck for not taking his own advice. But he prudently decided not to invest while it was trading so strongly. Buy at the bottom, sell at the top. The next year he once again regretted his decision. And the year after that. And the year after that. In five years ARM’s stock has increased five-fold. My friend didn’t get rich off ARM but plenty of other people did.
Yesterday it bucked an industry slowdown with yet another robust set of results: profits and revenues surged and the number of ARM chips shipped this quarter jumped 40 per cent to almost 2bn. If you look inside a smartphone today – and lots of people do, just check Google – you are almost certain to find at least one ARM chip. A conservative estimate places them inside 95 per cent of handsets but the true figure is closer to 99 per cent. High end models will contain as many as six. Altogether, more than 6bn were shipped last year, each one bringing home a royalty payment. The tech start-up from Cambridge dominates the fastest growing sector in the industry, having stolen the initiative from under the nose of established US rival Intel.
Chief executive Warren East admits there has been “an element of luck” in his firm’s success. Nobody – not even ARM – predicted the meteoric rise of the smartphone. “We knew phones were going to be high volume,” he tells me. “But we didn’t expect them to be as high volume as they turned out to be.”
Despite its blistering rise, ARM tries to keep a low profile. It has, for instance, resisted the temptation to open a London office: “Cambridge is just up the road,” says East when we meet in the West End offices of his PR firm.
He has been at ARM for 17 years, with over a decade spent as chief executive, making him, in some respects, the archetypal Company Man. But he is refreshingly open, very much from the British – rather than American – school of management, willing to discuss the thornier issues (he calls Autonomy boss Mike Lynch’s spat with Oracle “astonishing”).
East is slight and unassuming; smart but not showy – he still carries an iPhone 3, which seems a tad incongruous for one of the telecoms industry’s most influential men. He is also half Welsh, although you wouldn’t guess from talking to him – he is still bitter after visiting his home country to watch his side lose to France in the rugby last week. He joined ARM from chip maker Texas Instruments and his engineering background lends him an infectious fascination for his industry: “I’ve spent my life in semiconductors and quite a lot of it in microprocessors. Engineering is very satisfying, it’s fundamentally a creative thing.”
ARM put its eggs in the mobile basket as early as the mid 1990s, buoyed by a contract with then-market leader Nokia for an new digital handset. Now every major manufacturer, from RIM to Samsung to Motorola, uses its chips. The real driver, though, the thing that transformed smartphones from a promising experiment to the forefront of consumer electronics was, of course, the iPhone.
“It was such a big step forward, in terms of where the market was, that it stimulated a huge amount of competition. Without the iPhone we wouldn’t have things like the Samsung Galaxy S2 and clearly we have benefited from the smartphone evolution.”
ARM designed the processors inside Apple’s iPhone and iPad, a deal that has catapulted it into the spotlight. East is, however, reticent about his relationship with the Cupertino-based firm: “They really don’t like people talking about them”.
He also praises Google’s Android for contributing to the astonishing acceleration of the industry, with the number of smartphones now expected to reach 2bn within the next five years.
Intel has belatedly woken up to the reality that it was still sitting on the beach when the big wave broke and has ploughed its vast resources into breaking ARM’s mobile stranglehold. But it has a mountain to climb. Last week ARM announced a new chip it says is five times more energy efficient than that used in the iPhone. East describes the launch as “a gigantic step,” bringing the reality of the $100 smartphone one step closer.
Yet despite these successes, ARM is still seen as the underdog – a label you get the impression East has long grown tired of. It isn’t without some justification though: ARM employs 2,000 people, which sounds like a lot until you put it alongside Intel, with its payroll of more than 80,000. Its market cap is almost £8bn – considerably more than fellow Cambridge-based tech firm Autonomy prior to its takeover by HP – but Intel sits at £126bn.
“Intel is a much bigger company,” says East. “But it’s a much bigger company because it’s doing a lot more. They have their microprocessor architecture as we do but they also make the chips, sell, supply and market the chips and distribute the chips. We don’t. We just design them.
“If you look at the chip sales then we’re about the same size and same value. Last year both were about $30bn. The reason we’re different sizes is we only do a small portion of what Intel does. It isn’t really a ‘big-little’ situation.”
ARM’s success has inevitably led to takeover rumours – not least that Apple may be interested. East, though, sees little value for his would-be suitors. “I don’t think it would be a very sensible economic decision. ARM is a hugely influential company in our sector. But that isn’t a reason on its own for buying the business. You can benefit from its influence for a tiny fraction of the cost of buying the company.”
He says his task is to concentrate on ARM’s future – to both entrench its successes and continue its growth. The first is a no brainer: “We just have to keep coming up with superior technology. Someone has always got to have the better mousetrap”.
The second will see a further branching out from its core market. Last year 40 per cent of ARM’s chips went into devices other than smartphones and East sees this as a “tremendous growth area” for the business. “If you can perfect a chip for a phone then you have a great solution for TVs, digital cameras – anything you can think of.” He sets out a vision where ARM chips are incorporated into everything from medical implants to smart meters; a whole world powered by his firm’s architecure.
If he can achieve a fraction of this, perhaps it’s time for my friend to finally make that investment.
CV | WARREN EAST
Education: Engineering at Oxford
Career: Joined ARM from Texas Instruments in 1994 to set up ARM’s consulting business. He was vice president of business operations from 1998. In 2000 he was appointed to the board as chief operating officer and in 2001 was appointed chief executive.
Notable achievements and hobbies: Winner of the City A.M. business of the year award with ARM. Fellow of the Institution of Engineering, fellow of the Royal Academy of Engineering