Christmas comes in August this year, Arm’s IPO prospectus dropped yesterday, a document which we have been awaiting keenly for a long time. But like so many presents, this was not all that we had hoped for. We have read through the document once, but need to go through it a few more times to really get into it. Nonetheless, we have have some clear first impressions.

First and foremost, Arm did not grow last year, with revenue declining from $2.7 billion to $2.6 billion and change. The document describes this as flat which is fair, but with all the markets and future technology Arm likes to talk about, this is not encouraging. More than anything else, this is likely indicative of a company that remains heavily reliant on the smartphone market, and that market is not doing particularly well right now.

Second, the company continues to extract a small share from the value it contributes. Arm intellectual property (IP) powers all mobile phones, and many other devices. And yet they do not make much money from that. In the last fiscal year, licensees shipped 30 billion Arm-powered chips, worth $98,9 billion, but Arm generated only $0.11 per chip, a 2.7% royalty rate. This is not per core, but per chip. We have written in the past that Arm’s pricing model is broken, it’s largest customers have massive volume discounts built up over the years, which in addition to leading to financials like this also makes it much harder for new chip companies to adopt Arm and pay full price. Hence the growth of RISC V.

Admittedly, IPO prospectus filings have to conform to tight legal requirements favoring historical over prospective topics. And we have not yet seen the company’s road show materials. Arm has publicly and behind the scenes taking steps to change its business model, for instance working directly with end customers as well as what they refer to as “holistic” solutions. These could be very important in shifting the company’s prospects, but any mention of them in this filing is oblique.

Perhaps the biggest surprise in the document was the discussion of Arm China, including an attachment to the filing showing the agreement between the two companies (Note: We have just begun to scan the Arm China agreement which is dense legalese). Arm China, a separate company, is Arm’s biggest customer contributing 24% of revenue. The filing presents this as a straightforward relationship, but we know it is actually the result of a long, fascinating drama. The latest material is like a bonus season after the conclusion of a beloved TV show which everyone had thought was long over.

Finally, one thing that jumped out at us was some of the detail of the structure of Softbank’s ownership of Arm. This is held through an entity named Kronos. Last year, Kronos took out an $8 billion loan against its Arm shares. In theory, Arm is now on the hook to repay that loan in the event Kronos defaults. Given that the loan is collateralized by Arm shares, it is unlikely Arm itself will ever have to assume that debt. However, this is the kind of structure that private equity companies like to use to extract maximum value from their portfolio holdings, and is probably something for everyone to keep in the back of their heads in the event Arm suffers a prolonged period of a weak stock.

All in all, our impression is that Arn resembles a low-growth company coming to market to satisfy the liquidity needs of its private equity owners. We are certain that there is more to the story, and that Arm has some interesting technology and business model changes in the works. And their position in many market remains fundamental. That being said, our hope was that after seven years as a private company and a new management team with some big ideas, that the growth prospects would be a little more clear.