Headwinds are gathering against Arm Holdings, the British tech darling aiming for a landmark initial public offering (IPO) in New York this year.
Owned by Japanese conglomerate SoftBank, the Cambridge-based semiconductor designer’s chips are in almost every smartphone in the world, including all iPhones, as well as all iPads.
As crucial a relationship as this is to Arm’s success, it could also be Arm’s weakness, for Apple iPhone and iPad sales are in a real slump right now.
In last week’s third-quarter earnings call, Apple reported a slowdown in iPhone sales in line with broader stagnation in the smartphone market.
Revenues attributed to iPhone sales dropped 2.4% to US$39.67 billion compared to the third quarter of 2022. On an interim basis, sales fell 3.7% to US$156.7 billion.
iPad sales fared even worse, flailing nearly 20% when comparing quarterly results, though only around one percent when comparing interims.
It’s not just a problem for Apple.
Speaking to investors, Apple chief Tim Cook warned that smartphone sales across the entire consumer market face a decline in demand.
Smartphone shipments dropped by 9.5% year-on-year in the second quarter of 2023, according to data from Omdia and shared by Techradar.
This marks the eighth consecutive quarter of such a decline in raw unit volumes for the three biggest smartphone players - Apple, Samsung and Xiaomi.
According to the data, factors contributing to this downturn include the post-Covid-19 recovery, supply chain disruptions, diminishing consumer demand, and a growing preference for used and refurbished devices.
Samsung led the quarter with 53.3 million shipments, despite an 11.5% dip from the first quarter of 2023 and a 14.3% year-on-year decrease. Apple followed closely with 53.2 million shipments, reflecting a 24.6% quarter-on-quarter and an 11.7% year-on-year decline.
This is Arm’s core market, and the market is in a downcycle
What this means for Arm’s valuation in the lead-up to its highly anticipated IPO is unclear.
Cornerstone IPO investor Nvidia has been wrangling over Arm parent SoftBank’s US$70 billion valuation target, with the US GPU maker instead pitching for a US$30 billion buy-in price.
Given that Google-owner Alphabet, Apple, Microsoft, Taiwan Semiconductor Manufacturing Company and Samsung Electronics (KRX:005930) have all expressed interest in investing in Arm’s IPO, Nvidia’s bargaining power may be limited.
Yet there is little doubt that Arm’s revenues have taken a hit from the global smartphone downturn.
In SoftBank’s earnings call on Tuesday, Arm reported a 10.8% year-on-year drop in net sales, amounting to US$78 million, primarily due to a decline in royalty revenues from markets like smartphones.
Royalty revenue saw a significant 19.3% dip, while license and other revenue experienced a modest 3.6% rise, buoyed by Arm's major deals in sectors like automotive and AI.
The company posted a segment loss of ¥9.5 billion (US$65.8 million), attributed to the fall in net sales and rising expenses, including those related to stock compensation schemes and increased research and development staffing.
Though Arm’s anchor investors outside of Nvidia have yet to pipe up with a discounted valuation, it seems like the bargaining chips are more fairly distributed on both sides of the table right now.