Katie Perry (00:00):
Chances are today's show is very relevant to you. We've got a company whose designs touch some 70% of the global population. Anne.
Ann Berry (00:08):
That's right. Our guest today is Jason Child, CFO of Arm, which sits at the very beginning of the AI value chain with CPU or CHIP designed. Katie, I've been so excited for this one. I've been following ARM since it about a year ago, and it was a little slow out of the gate actually, if you looked at the share price, even though AI fascination was really picking up in the market. So curious to see how they've been executing since then. Number one and number two, SoftBank controls this business, probably about 90% of the shareholder base. So I want to hear how as A CFO, they handle having effectively one control shareholder.
Katie Perry (00:43):
We also talked about the AI talent wars. Their employee base is 85% engineers and I heard that they're pulling in about 35,000 applications a month. How are they attracting talent? How are they retaining it? How do they plan to stay on the top of their game? Looking forward to getting into all of that today with Arm CFO, Jason Child, we are here with Jason Child, CFO of Arm. Jason, welcome to After earnings.
Jason Child (01:11):
Thank you so much for having me.
Katie Perry (01:12):
It's great to have you with us today because I really think our listeners could benefit from some education around the AI value chain and specifically where ARM sits within that. Can you break that down for us?
Jason Child (01:24):
So ARM is a compute platform and if I kind of unpack that, what that means is we provide a variety of design technologies that are ubiquitous in really all the devices that we use on a daily basis. If you go back to our history, we are most known for developing the most power efficient CPU in history and it's the CPU that was designed to work on a battery powered device, which a couple of decades ago it was not that big of a deal. It's turned out to become a really big deal, especially with smartphones. And then now as the world has become kind of power hungry, so to speak, it's become really important in data centers. It's becoming critical in automotive, it's becoming critical in any IOT or camera, any sort of a kind of edge device. And we are very quite ubiquitous in that we're in devices that touch about 70% of the world's population.
Katie Perry (02:19):
Right, and that includes the Apple iPhone 16, correct?
Jason Child (02:22):
It does.
Katie Perry (02:23):
Okay. And also the fifteens,
Jason Child (02:25):
It would include all of them.
Katie Perry (02:26):
All of them. Okay. So if anyone listening has an Apple smartphone iPhone, you are interfacing with this company. You don't even know it. Perhaps
Jason Child (02:35):
Also, it actually includes about 99.5% of every iPhone. So unless you're in a third world country using a phone that we haven't heard of, it's using arm.
Ann Berry (02:45):
Jason, let's get back a little bit in history. It was a really exciting 2023 for you Arm went public and we are now about a year in change post that IPO. Can we touch on some of the coverage that you got? At the time there were real questions about arm's business model and you've now had a year to prove how accurate or misconstrue those questions are. So let's start with one. There was a concern at the time you went public that ARM wasn't necessarily on the cutting edge of the newest kinds of chips and if you actually look at your revenue base, a decent chunk as royalties coming from designs that in some cases are more than 20 years old. Talk to us a little bit about that.
Jason Child (03:25):
Yeah, that was actually I think the IPO and specifically the roadshow was a great chance for us to try to really explain how the model works. And the way the model works is we actually sell designs via licenses and that license revenue is kind of our initial revenue and think of that as almost being kind of starting point. And then what happens is as all those licenses turn into what we call design lens or actually turned into actual products that we get paid royalties.
(03:55)
And so what's interesting is when you look at our model and you look at royalties, you're mostly looking at products that have all been developed in the past and we're developing and actually receiving royalties on products that, as you said, go back a couple decades, which from a CFO's perspective, that's fantastic. Now with the license revenue, when that starts to grow, that is a great indicator. It basically tells you that there's going to be more royalties coming in the future. And so if you go back to the IPO, we told people we have a great royalty business. We do have a strong license business, but keep an eye on licensed revenue because as you see that growth, that's an indication that the growth in royalties is going to continue to compound. And if you go back over the past now four quarters since we've been public, we've had significant increases in license revenue every single quarter, which provides a great setup for overall revenue and especially royalty revenues going forward.
Katie Perry (04:54):
And of course that royalties revenue is a recurring revenue source, correct. So investors should be thinking about that when they're looking across licenses versus royalties. Other ways you guys make money as a CFO, you must love that revenue stream.
Jason Child (05:09):
So I came from a SaaS company before this and I saw this and I saw a business that was actually one of the few businesses that I thought looked even better than SaaS. And that is because yes, it's recurring, but I don't have support costs. I basically have a royalty audit team. And so it's basically a hundred percent margin and I would also most, if you wanted to compare it to a business, it's probably closer to the music business where when an artist has a hit and that hit goes on for 30 years, you keep getting paid royalties on it.
Ann Berry (05:41):
Just hone in a little bit more on the licensing track record that you've had saw that your licensing revenue is up 70% most recent quarter, it was up also 70% in your Q4 earnings. Talk to us a little bit about which customers are driving those licensing revenue growth numbers.
Jason Child (05:58):
So I can't get into specific partners when we sign these fairly large deals, they typically always require privacy around the things that they're working on for I think obvious reasons. However, what I can say is the general focus of exactly what they're buying is they're basically buying our latest technology, which we call V nine, our version nine of our technology. It's been out now for about two years and V nine is critical because it is what is effectively enables any electronic to be kind of ready for ai. So there's certain security protocols, certain kind of power efficiency protocols that are required for an AI oriented chip to be able to function well because of AI and how that has become such a strong growth driver for really the whole semiconductor market over the past four quarters. The interest and I guess desire and need for that new BEN nine technology has been very, very strong and that's really the key driver.
Ann Berry (07:00):
Jason, let's drill a little bit more into where AI is going with the demand for chips and at the surface level, we've seen almost euphoric expectations in the market with respect to the applications and the adoption of ai. But if you look along the value chain, we've seen some in the semiconductor industry struggle, Intel for example, challenges with staying at the leading edge of chip innovation. And if you peel it back, it looks as though Taiwan semiconductor is really the only foundry at this point of note, when it comes to the most sophisticated chips, what does that mean for you and for your business?
Jason Child (07:37):
We work very close with all the fabrication partners. Certainly TSMC is a very, very large one. We do actually work with Intel and their foundry. We do work with Samsung and all the other. There's a variety of foundries out there. We work closely with all of them. I would say that surely TSLC has probably been a little bit ahead of the curve on some of the newest smaller geometry form factors. I do expect there to be competition. I know there's been CHIPS ACT has certainly been a key point to try to increase investment to maybe increase the diversity of the fabrication supply chain. I think our general view is we're somewhat agnostic on that. However, I think in general diversification and competition's probably going to be great for everyone including us.
Katie Perry (08:25):
On that note of competition, Jason, I'm curious how you think about the talent war that must be going on. I know you're an engineering led organization and I can't even imagine the battles going on for some of this talent currently. How do you guys position yourself to attract and retain top talent as that seems like it would be core to winning in this environment?
Jason Child (08:49):
Yeah, it's a great question and it's funny, I've been part of an IPO before and I remember the kind of conventional wisdom is why go public? And that question is a very common question for private companies and I think you talk about the typical financial needs of access to capital and the normal financial needs, but then there's also this notion is there really kind of a press event or a PR event or something that can create a branding event for the company? And I know it's a debate that there's some strong opinions on both side. What I can say both sides. What I can say for us is what was fascinating is yes, we are very much an engineering led company, 84% of all of our headcount, our engineers, that's about the highest percentage in my career that I've ever seen anywhere. And what's fascinating is when we went public, the amount of inbound resumes or CVS that we received before IPO was about, I think it was about 500 a month.
(09:45)
And then since the IPO, it's been about 30 to 35,000 per month and it's continuing every month. And so for us, I would say maybe it was a branding event from an employment and from a recruiting perspective. So as a result, I'd say in terms of the war for talent, it's definitely changed things quite a bit. And as a CFO, that's a high class problem because we've added, I think when we first filed the F1 or the foreign version of an S one, we had about 6,500 employees and now we're a thousand beyond that. And we've told folks we're going to hire at least another probably 1200 folks this year. And so it's certainly something that has helped us to be able to do well in this war for talent. That said, with the world of AI and all of this, I think there's just so much so speculation on who are the winners going to be and whatnot.
(10:47)
We've been lucky enough to be in a great place because of I think one, the IPO helped raise awareness, but then two, because of the ubiquity of our platform, it's actually helped us to I think really be in a great spot. That said, in my experience that stuff you can't count on, you really have to make sure you're investing in I'd say building the right brand from an employment perspective. And we do have, I think a very strong brand and we do pretty well in a lot of the surveys and we do focus very much on the employee experience from all the various aspects from, we have a very strong DEI program, we've got a strong climate program, we've got strong development personal development programs, we have high ends with universities. We're of course based in Cambridge uk. So there's a number of things where I think we've done a lot of investment there to put ourselves in a pretty unique position, but it's kind of a war to your point that never really ends. And so it's going to have to continue to be a huge focus.
Ann Berry (11:50):
Jason, it's a war that's some very glamorous entrance look like they're going to join with Summer Plum. You've got Sam Altman OpenAI, Sam Altman talking about wanting to get aggressively into the chip design and also manufacturing part of the value chain. You've got others like the Metas and the Googles of the world. These are big brands that have been known for being on the cutting edge of innovation, at least I think top of mind for consumers. Talk to us about how ARM is thinking about the entrance of folks with that caliber and with that kind of capital behind them.
Jason Child (12:24):
Those are all great companies. We have pretty strong relationships with the companies you mentioned. Certainly if you just look over the past couple quarters, Google announced their Axion chip, which is their kind of ARM-based CPU infrastructure or data center chip that is maybe a little bit akin to kind what AWS did with graviton. Microsoft had announced Cobalt, but a little before that I would say some of the other hyperscalers or cloud service providers have announced that they're working on programs with ARM as well. So I would say all of those players that you mentioned are really strong partners that we're very, very well integrated with and work closely to make sure that we're providing the types of solutions that are going to address the technology and needs that they see going forward.
Katie Perry (13:15):
Jason, you've walked us through sort of the before and the after of the IPO journey, and one thing that's really unique about you all is how relatively small your public float is. And I'm curious how you think about that and if you can give us some clarification around how much of the company is publicly available to investors.
Jason Child (13:35):
So we have about 12% that is owned by the combination of SoftBank as well as the employees. SoftBank a little over 10% employees, a little kind of less than 2%, the remainder owned by SoftBank. And I think on the one hand it's a relatively small float. On the other hand, at our current market cap of, I don't know today, somewhere in the hundred 40 ish billion range, it means that we have about 17 or 18 billion of actual float in the market, which relative to our total valuation is maybe not significant, but relative to absolute dollars, it's certainly not a small amount. I think in the grand scheme of things, would my life be easier if we had a larger float? Maybe that said, it's easier in that I think when there's strong demand for our stock, which there has been, it helps. That said, it also helps because I do have one investor that makes it easier if I know exactly what that investor's looking for
Katie Perry (14:44):
In terms of trying Yeah, I was going to say that must really streamline investor relations quite a bit, so I'm sure your IR team is fairly happy,
Ann Berry (14:51):
Jason.
Jason Child (14:52):
Yeah, it helps. It helps.
Ann Berry (14:54):
Jason, master son, the CEO of SoftBank has articulated that he has big dreams, big visions for ai. Is there a conflict between the vision of SoftBank as your majority and controlling shareholder versus what perhaps might be optimal for public shareholders?
Jason Child (15:14):
I don't think so. And the reason why is I've actually worked at some SoftBank portfolio companies of the past, and so certainly they famously provide lots of capital. I would say here the difference is MASA has very bold ambitions. He's talked about his 300 year vision and recently he's talked about his focus on a GI and I think artificial super intelligence and because of his ability to, I'd say raise capital and appeal in his connections with some of the largest investors involved, some of the largest companies in the world, I would say it's actually helpful. And so I would think of us as being a key piece of his overall strategy. So our CEO, Renee Haas is actually on the board of SoftBank as well as of course being on the arm board. Masa of course is the chairman. He's actually chairman of arm. And so every board meeting we have is of course led by him. So I would say I think it's generally a strength because it does give us access to, I think a lot more if we're a standalone company, we'd be doing this on our own. But with our connection to SoftBank, we have access to I think a broader range of investors, a broader range of other companies that are part of the SoftBank portfolio that we could work with.
Ann Berry (16:39):
We talk to a lot of CFOs here, Jason, and one of the things that we often raise is how do they feel about the expectations of the public market, usually in a very short term timeframe, sort of living quarter to quarter, when you contrast that with a soft bank, it tends to invest primarily in privately how companies and has the luxury of being able to take a longer term view. How do you feel in your seat in trying to manage quarterly expectations versus what could be a longer term and perhaps bumpier ride with a majority privately held owner?
Jason Child (17:09):
I think the good news is, and for my interactions with Masa, he is a very sophisticated investor who actually, I think Vision Fund of course is known for being mostly private, but a lot of those companies from the first fund have gone public and many have done quite well on average. They've done very well across at least the first fund. And his experience for dealing with both private and public companies is actually very sophisticated. And so when we talk about how do we make sure that we're setting targets that are the most appropriate approach for managing Wall Street, while also keeping in mind how do we think about the long-term opportunities where one could really invest a lot in the near term, and obviously you have to balance near term investment with the near term ROI. So I would say Moss is extremely advanced at that and it's actually been very helpful. And so I think so far it seems like we've been able to manage that relatively well. That said, there's so much potential and opportunity out there that is probably the thing we spend a lot of time talking about is should we go invest in X, Y, Z companies? What could we do via m and a versus hiring or building on our own? And what would be the way for us to capitalize on this kind of AI opportunity as fast as possible? And that is the daily debate I would say.
Ann Berry (18:44):
Jason, talk to us a little bit about m and a. That is something that I know came up in your earnings called transcript. You do have a good cash balance, strong balance sheet. Where might you deploy those dollars?
Jason Child (18:56):
Well, my standard response, as you may have heard, is we are now just hit our one year anniversary. So at this point we're probably more focused on looking at m and a versus say doing a dividend or buyback given how short our tenure as a public company's been. I think also given what you've heard Masa talk about in his ambitions and our ambitions for the AI opportunity, I would say m and a is certainly something that we're evaluating. If you look at our history, we've acquired many, many companies. Typically we've acquired smaller companies that are probably more tech and talent, and we have operations all around the globe and many of those offices in different parts of the world came through acquisitions. And so I think that's something we'll continue to do. But in terms of anything specific, we haven't provided any specifics. It is an interesting market because the valuations are, and Moss understands valuation well, and the valuations are, I would say still not low. And so as a result, I would say nothing imminent to discuss.
Katie Perry (20:09):
Jason, quickly to jump back a bit when we're talking about the ways you make money, I did want to ask about the cloud products or solutions that you're offering and want to wrap my arms around what that actually means in practice. Could you quickly break down what that looks like within ARM and what your expectations for that line of business will be moving forward?
Jason Child (20:31):
Sure. So the primary cloud exposure that we have would be through what we call our infrastructure business, which is one of our four lines of business. And in that business today it's, I would call it a little less than 10% of the total business, but it's coming from a very, very small base. The primary area that we're really getting exposure to is on the cloud compute side, and that's where the arm technology, which is so much more efficient than the X 86 alternatives, that's where you saw first Graviton then now you've seen Cobalt and Axion. There's other products coming from other companies in that category. We're still pretty early in the deployment cycle because even though you have a new chip that's really efficient, you still have underappreciated older chips out there that it's expensive to replace. If you just look at our market share in the cloud compute area, we've gone from low single digits just a couple of years ago to about 15% of the market in this last year. We've actually said that we forecast that we expect to have probably about 50% of the cloud compute market share by 2030. So I'd say the seeds have mostly been planted and it's now mostly about deployment and then maybe new generations of chips coming from some of the hyperscalers and cloud service providers.
Ann Berry (22:01):
Jason, that performance and that development has certainly been rewarded in the public markets. Your share price is up about two and a half times from where you went public. And when you look at what the street has to say, you've had a solid reception by Wall Street analysts, but your share price now is starting to bump up against the price targets that are out there. On average, do you think there is a message that the street is missing that would provide upside to where you are from today?
Jason Child (22:29):
No, I think it's just a matter of the typical approach is if you have a really solid fundamental business then and you have a place now where interest rates are no longer zero discounts, rates really matter. And so as a result, if you continue to deliver growth and you continue to meet or beat expectations, then you'll probably see those price targets come up as you deliver strong numbers. And so I'd say we're mostly focused on making sure they understand the story, and I think the price targets seem pretty reasonable based on most of the valuation metrics that people look at. And at this point, as long as we continue to develop, then I would expect that as we continue to perform well then hopefully you'll see those targets go up over time.
Ann Berry (23:17):
And Jason, I have to ask, because we are in the throes of election season, and when you went public, I remember this, there was a lot of focus on the concentration of your revenue base in China, which as a fiscal year end 2024, I think you disclosed in your annual reporters in about 2020 1% of your revenue base. Now we're going into an election where both candidates are talking about continuing to be tough on China. What does that mean for your business and how do you see that concentration changing over time?
Jason Child (23:47):
Well, I would say what's interesting is this last year it went from 21% and actually last quarter it was down to 13%. So it's actually come down a fair amount and that's a variety of reasons. I wouldn't say it's necessarily anything more than a which of our partners have had just stronger growth and where those partners are based. I would say that we do sell designs, we don't sell chips. And so the current restrictions that exist don't necessarily affect us like they do some other companies that said, obviously we are going to do whatever we need to make sure we comply with all the different regulations. And so I think for the most part, we feel like we're pretty well positioned to continue to capitalize on the opportunity regardless of whatever geography our partners sit in. And I do think it probably will be continue to be complicated regardless. I don't know, regardless of who wins in the fall, I think I am guessing that restrictions aren't going to knock, going to lessen, and I'm guessing that there's going to continue to be a lot of complications that everyone in the semiconductor has to work through. And so I don't think there's anything that's really unique to us. But so far I think we've been happy with the performance of how our businesses in China have run and at 13% of revenue, it's important, but it's not critical.
Katie Perry (25:14):
Jason, I want to ask on the subject of headlines, your former employer, Amazon made some headlines recently, Andy Jassy coming out and saying five day work in office mandate. I know you are formerly the CFO of Amazon International. Do you have any hot takes on that decision or thoughts generally?
Jason Child (25:35):
Okay, so any hot take I have is purely an opinion, and I haven't talked to Andy or anyone at Amazon specifically about the move they made. I did read his letter and it was as my experience with Andy was, it was very well thought through, and I think it all makes sense. My view of Amazon's approach in the culture has always been that it's a unique culture. They're proud of the unique culture, and I think they're also proud of the fact that it's not for everyone. And so they like to be very clear about what the rules and what they expect of folks. And if it doesn't work for folks, then that's okay, but they'd rather, instead of having people maybe not be fully aligned, but still be working there, but being passively disagreed, I think they just want to be very clear, this is what we're expecting and looking for, and if this really works for you, then fantastic.
(26:25)
If it doesn't, then let's figure out what the right alternative is. So I thought I'd say good for him, at least for being transparent. I do know a lot of folks who I've talked to that are at other companies, a lot of CEOs are concerned about this. It's really tough. And certain cultures that really depend on that in-person experience are frustrated, but then they kind of feel like, well, but I don't know if employees will accept it, so let's try to just not really deal with it and be kind of stuck in the middle. And so I think it'll be interesting to see what happens. I applaud Andy for taking a bold move and I imagine we'll all be watching to see kind of how it works out. Having spent 12 years there, definitely it was at least five days a week of 12 years. I'm interested to see how it goes, but knowing Andy and knowing Amazon, I'm sure it'll work out. I don't know if this will be the last chapter though.
Katie Perry (27:28):
Alright, Jason, thank you so much for joining us today on After Earnings. Loved hearing about Arms Journey and what you're up to over there. You'll have to come back soon.
Jason Child (27:36):
Thank you so much. I really enjoyed it.
Ann Berry (27:38):
I'm Katie Perry. And I'm Ann Barry. Thanks for tuning into After earnings, the show that brings you up close and personal with the executives behind the world's most interesting publicly traded companies.
Katie Perry (27:49):
And if you learn something today, don't forget to like, subscribe, share with your friends. Upcoming episodes will feature CEOs and CFOs from major telehealth, travel and tech companies.
