Cadence Design Systems (CDNS) earnings were good, as per usual. Nothing we felt like we needed to specifically address. But there were some management comments made regarding an expanded relationship between Cadence and processor technology licensor and IP leader Arm Holdings (ARM).
It seemed pertinent given Arm and Qualcomm‘s (QCOM) tit-for-tat legal battle. The court date is scheduled in December. Is Qualcomm in trouble? And what’s up with Arm and Cadence chumming around? Surely there’s a winner that will emerge from this battle.
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EDA, IP, ISAs, and other chip alphabet soup
Let’s define a few terms.
When we are talking about IP (intellectual property), it could be patents on parts of the design or functionality of a chip. Or in the case of Arm, it could also be the architecture of its chips, which refers to the instruction set architecture, or ISA, which governs how the hardware performs when given instructions to operate.
See our blog posts and videos from a year ago, when we were talking about ARM chips and QCOM vs Apple. https://chipstockinvestor.com/qualcomm-vs-apple-will-history-be-changed-as-two-new-chips-target-the-laptop-market-giants/
When we are talking about system design, it could be chiplets, or designing how chips will be arranged on a circuit board for a computer or electronic equipment – like a car for example.
Or it could refer to something big like a data center, a giant supercomputer. Or a total system could be a PC/laptop, smartphone, car, industrial equipment, whatever. You get the idea. Lots of chips and components arranged into a fully-functioning electronic or computing device.
Then there’s EDA software, or electronic design automation, for all things chips and electronic component design. When dealing with microscopic features and circuitry, specialized software is needed to automate the placement and design of these tiny parts of a chip.
Cadence says it expanded a partnership with Arm. Why?
Here is the first quote from the Cadence earnings call from CEO Anirudh Devgan about the deepening relationship with Arm. Arm is historically an IP company, and Cadence historically the EDA company.
When an engineering team is designing a chip or system, the use of previously developed IP is common to accelerate the process (why “reinvent the wheel,” or in this case, the circuitry?). It makes sense that Cadence and Arm would work closely together to help their mutual customers get design work done.
Notice these days, most of Cadence’s revenue is still core EDA software. However, IP for various parts and functionality in a chip is one of their faster growing segments. What kind of IP do they have?
A lot of different connectivity IP, like ethernet, USB, PCIe, and memory physical layer interfaces.
By contrast, Arm traditionally is a licensor of chip architecture (ISAs) – especially CPUs that companies could use to make their own custom chip designs. Think Apple’s processors for the iPhones and more recently the MacBooks.
But Arm has been doing more design work for actual chip hardware, like processor cores and now even GPUs. They do this because lots of companies are interested in doing some level of customization to chips that they need for their products or operating a business. But starting from scratch is hard, so starting with some design help from Arm makes sense for a lot of non-chip businesses.
As was mentioned in the Q&A section of the last Cadence earnings call, this is why the partnership is strengthening between Cadence and Arm. Cadence has the design software and interconnect IP, and Arm has the world’s largest processor IP ecosystem and lots of customers building atop that ecosystem. Arm’s expansion means a growing EDA customer base, including Arm itself, for Cadence.
Arm and Qualcomm go to court, and Arm escalates the feud
What does Qualcomm have to do with all of this? Qualcomm is one of Arm’s largest customers. Arm mentioned the new Snapdragon-powered Windows PCs as being very exciting over the summer of 2024. And rightfully so. If Qualcomm can steal market share from the Intel–Amd x86 PC and laptop ecosystem, Arm wins.
And yet Arm and Qualcomm have been in this legal battle for a couple years now.
In the most recent chapter in this saga, Arm has threatened to revoke Qualcomm’s license in 60 days (corresponding to the expected start of the court proceedings in mid-December) if Qualcomm doesn’t comply with Arm’s demands to cease shipping those new laptops or renegotiating an IP license.
How did we go from “Arm is excited about new Arm laptops” to “Arm may not even want Qualcomm to ship any of these laptops anymore” in just a few months time?
This battle dates back to when Qualcomm acquired a startup called Nuvia back in 2021. Nuvia was started by some engineers from Apple, and specialized in – you guessed it – designing Arm based processors.
With this acquisition, Qualcomm got its hands on what has become today the basis for the Snapdragon X Elite chips for laptops.
Under normal circumstances, this is a mutually beneficial relationship between Qualcomm and Arm. But if Arm (seemingly) has its way, neither company gets any benefit from selling laptop chips. And for Qualcomm, a total revocation of its Arm license would cut it off from fundamental IP it needs for all of the Snapdragon chip ecosystem.
We think this is going to get resolved without Qualcomm having to cease all design of Arm-based chips. But what is Arm’s motivation for going down this path in the first place?
The stakes are high as semiconductors infiltrate the whole economy
Here’s a slide borrowed from Cadence EDA peer, Synopsys.
Notice the EDA and IP market is tiny compared to the $2 trillion in electronic and computing system sales every year.
Put simply, the reason for Arm’s actions is they want more money. They feel they are instrumental, not just in the design of chips anymore, but in entire electronic and computing systems.
Remember this slide above from earlier? Arm no longer involves themselves in just chip architecture, but in total system architecture. Arm has been moving a lot of its big customers over to a new licensing model that captures the entire electronic system sales value, not just the chip value like it did in the past.
Here are two more terms we need to define before we continue explaining Arm’s evolving business model (stomping on its customers’ lawn?).
Here are the new licensing model options. We’ll focus on “Total Access” and “Flexible Access.” Total Access, as the name implies, is the most expensive option, and Flexible Access is for smaller companies just getting started in customizing chips, or for a startup… like Nuvia.
Here’s a closer look at the Flex license options. A free membership or licensing tier is offered, all the way up to a reasonable $212,000 a year for a bit more access to Arm IP. With this model, Arm has it built in where they make their money off of the royalty fees if/when chips are taped out at the fab.
“Taped out” at the fab means the design is finished and the design is sent to the fab to start production.
By comparison, here are the packages for Arm Total Access. These licenses are for much bigger companies, and especially big chip designers like Qualcomm that do lots of design work for a myriad of different products.
These packages give a full range of access to Arm IP and software, and depending on what a big company needs, the licensing fee is no longer minimal. Millions of dollars in fixed payments, plus lots of royalties for what is likely to be a mass production chip, are involved with Total Access payments to Arm. Note there are no dollar-amounts fixed to these plans. It’s negotiable, but the licensing price tag can be many millions of dollars, or much more.
So what? Well, licensing fee revenue has been a top driver of growth for Arm, especially since the partial spin-off from Softbank (which, by the way, is still far and away the majority owner of Arm).
Connecting the dots in the Arm-Qualcomm debacle
We suspect that Nuvia had something like a cheaper Flex Access license when Qualcomm acquired it a few years ago. Arm probably feels like it is entitled to a larger license fee than what it received from Nuvia prior to it getting acquired, since Qualcomm purchased the startup to get into the very large laptop business. A higher license fee, in the view of Arm, could be in keeping with Qualcomm’s existing Total Access license fee for Snapdragon devices like smartphones.
Qualcomm’s assertion is that it already pays Arm plenty of money via its existing Total Access agreement, so therefore it is covered to use Nuvia’s designs to create the Snapdragon X Elite laptop chips.
What’s silly about this is Arm is already going to be making lots of royalty revenue if the X Elite is a big hit. It’s too soon to tell if this will be the case, but early indications from Qualcomm are that it’s selling a lot of these laptops since they became available in summer 2024.
Note that Arm’s consumer electronics chip market share is now at 30%. This is set to rise further in the coming years. So why go after Qualcomm, one of its key customers? Perhaps Arm just wants to ensure it gets its cut of the design licensing regardless of Qualcomm’s new foray into laptops is a whiff or a hit.
It seems like a short-sighted high-stakes game for Arm to play. Arm is already playing a risky game by expanding into total system design, which could put into increasing competition with its most important fabless design customers, like Qualcomm.
EDA FTW
Who wins from all of this, assuming a semi-amicable resolution to the Arm-Qualcomm battle?
Whether Arm continues to expand into chip and system design and decides to increasingly compete with its fables chip design customers, or Qualcomm keeps diversifying beyond smartphones into laptops and autos, Cadence gets to sell more EDA software access and interconnect IP. Though EDA and IP is one of the smallest components (by revenue) of the chip and electronics sector, Cadence (and peer Synopsys) are in a powerful position to leverage their essential software and IP tech to the whole industry ecosystem.
Later in the earnings call Q&A, CEO Devgan said as much. EDA is foundational, so Arm playing games ultimately is a win for Cadence, even if it gives Qualcomm headaches. And if Qualcomm wins, well, Qualcomm is a Cadence customer too.
Cadence is a weapons dealer, of sorts, in this tech war.
The drawback here is that Wall St has picked up on these trends, and has rewarded both Cadence and Synopsys with much higher earnings multiples than they’ve fetched in the past. But part of the elevated premium on both stocks has to do with their business cycle too. See our last video on Synopsys here, which explains why Cadence and Synopsys could be headed for a run-higher in profitability in 2025. Is THIS AI Chip Stock the #1 Buy For Long-Term Growth? (SNPS Stock)
