By Echo Wang and Svea Herbst-Bayliss
NEW YORK (Reuters) - SoftBank Group Corp's Arm Holdings Plc on Thursday told potential investors in its roughly $5 billion initial public offering that cloud computing expansion and royalty revenue represented major growth areas for the chip designer.
In a gathering of more than 100 investors at one of New York's most luxurious hotels, Arm Chief Executive Rene Haas and his management team gave details on the company's prospects beyond the mobile phone market, of which it already commands a 99% share, people who were in attendance said.
Weak mobile demand during a global economic slowdown has caused Arm's revenue to stagnate. Overall sales totaled $2.68 billion in the 12 months to the end of March, compared to $2.7 billion in the prior period.
Arm is seeking a valuation on a fully diluted basis of $50 billion to $54.5 billion, less than the $64 billion SoftBank assigned to it in a transaction last month with the $100 billion Vision Fund that it manages.
While some investors and bankers that Reuters spoke with after the presentation were upbeat, it remained unclear how strong the IPO's reception would be. Arm has already secured the participation of several customers, including Apple Inc, Nvidia Corp and Alphabet Inc, as investors in the IPO. It is scheduled to close the books and price the offering on Sept. 13.
Arm told potential investors on Thursday that the cloud computing market, of which it has only a 10% share and therefore more room to expand, is expected to grow at an annual rate of 17% through 2025, partly thanks to advances in artificial intelligence. The automotive market, of which it commands 41%, is forecast to expand by 16%, compared with just 6% growth expected for the mobile market.
"They said that Apple use 100% Arm architecture (because of Arm's dominance in smart phones). The future growth driver is to expand market share in the Windows PC market," said Ryuta Makino, a research analyst at Gabelli Funds.
Arm also told investors its royalty fees, which account for most of its revenue, were accumulating since it started collecting them in the early 1990s. Royalty revenue came in at $1.68 billion at the latest fiscal year, up from $1.56 billion from a year before.
An area of scrutiny for investors has been Arm's exposure to China, given geopolitical tensions with the United States that have led to a race to secure chip supplies. Sales in China contributed 24.5% of Arm's $2.68 billion revenue in fiscal 2023.
Virtually all of that revenue comes from Arm China, an independent entity with exclusive rights to distribute Arm's technology in the country and is Arm's largest customer. ARM China has a history of late payments and presents "significant risks" to Arm's business, the company's IPO filing said.
Arm said in the filing that it was owed $386.9 million by Arm China as of the end of March. Arm's chief financial officer has told investors during the marketing of the IPO that the company was not concerned about being paid back.
(Reporting by Echo Wang and Svea Herbst-Bayliss in New York; Additional reporting by Max Cherney in San Francisco; Editing by Greg Roumeliotis and Richard Chang)