Position: Long Blyth Hardware Group

Position: Long Blyth Hardware Group

Investment Thesis The market doesn t fully comprehend the possibili7es for ARM technology in new sectors and is overly pessimis7c on ARM s ability to increase profitability and stave off compe7tors, while we believe ARM is well posi7oned to con7nue domina7ng the low power compu7ng market in both new and tradi7onal compu7ng spheres, making ARM a strong investment choice and an above average proxy for this high growth sector.

Company Overview Ticker (ADR): ARMH Current Price: $44.88 Market Cap: $20.95B 52-week range: 34.75-55.26 Dividend Yield: 0.91% ARM is the world s leading semiconductor design company Main business is in low-power CPUs In 2013, it signed 121 new licenses, bringing the total to > 1000 Cumulative total ARM-based chips: 50 billion Strategy is to develop and license technology that semiconductors can incorporate into their chips Competitors: Intel, Imagination Technologies, AMD, Nvidia

Industry View

Products Design low-heat, high efficiency 32 and 64 bit chipsets that are used for purposes ranging from cell phone CPU s to server farms Compared to chips from Intel, ARM chips use less power and generate less heat, and so are much more desirable for mobile devices and devices that generate significant heat Currently, ARM designs are found in 95% of smartphones, 95% of tablets, 45% of digital set top boxes, 50% of home routers, and 25% of microcontrollers Unlike Intel or Samsung, ARM does not own any foundries, or chip production facilities, and so does not produce any physical products

Business Model 1. ARM invests in R&D to produce low-energy chip designs. Usually 2-3 per year 2. ARM sells the design to semiconductor manufacturers and receives revenue up front from the licensing fees. 3. It takes the manufacturers 3-4 years to build the chip/the product that incorporates the chip. The manufacturer pays royalties for each ARM-designed chip that it sells. The royalties depend on the price of the chip. 4. ARM receives royalties for the entire lifetime of the chip; may last as long as 20 years. Licensees

Revenue Breakdown

Management Team CEO (2013) & Board Member: Simon Segars Ex-EVP Engineering, Worldwide Sales, Business Development, Processor and Physical IP Divisions Focused on ARM s growth due to rise in mobile computers, internet infrastructure, and servers CTO (2000) & Board Member: Mike Muller A founder of ARM, focused on growth and flexibility of tech Ex-EVP Marketing, Business Development, ran hardware strategy at Acorn Computers EVP Internet of Things (2014) : John Cornish Holds 5 US chipsets patents, previously worked with Texas Instruments Ex-EVP System Design Division Chairman of the Board (2014): Stuart Chambers 10 + years of Board and Executive experience in UK and globally, held a variety of leadership roles at Royal Dutch Shell, Chairman of Rexam and non-executive director of Tesco

Why ARM? Stable predictable growth provided through mobile phones Expansion opportunities into highly lucrative new sectors Increasing profitability from technical changes and company maturation Inability for competitors to cut into market

Growth of Mobile Phone Markets More than 1B smart phones w/ ARM processors were shipped in 2013. CAGR: 10% over next 5 yrs 20% CAGR over next 5 years for smartphones in developing markets, smartphones bring in 4x revenue per chip from voice-only phones ARM s share of mobile phone processors has remained above 95% for the past 10 years

Internet of Things Idea that future products will all be connected to the internet, allowing things like street lights and cars to communicate with each other Projected to be worth $19 trillion over next 10 years by Cisco CEO John Chambers, $10-20 billion of these devices by 2018 ARM architecture is by far the best suited to power these products, every one of which would have their own ARM chip Market doesn t comprehend extent of immense upside - depending on royalty and number of devices, ARM could generate $2-8 billion over the next 4 years from this market alone

Other Expansion Opportunities Growth of Tablet Business Technology Laptop and desktop sales are plummeting ARM has <95% tablet market share, the only sector of large computing devices that is growing Isn t a key area for ARM and is correctly priced, but continuing replacement of computers by tablets will continue to drive revenue Company projections give them a meagre 10% business intelligence market share and a 1% server share Companies like AMD are innovating with ARM technology and creating business solutions Industry has large upside, but will be difficult to penetrate due to Intel s business relationships

Increasing Profitability ARM currently only has an operating income of 153.5M on a 714.6 revenue Low operating income to revenue due to loss leading pricing to gain market penetration, large R&D costs associated with gaining technological advantage New features and changes in chip design have allowed ARM to charge more per chip In future, profitability will increase sharply as customers continue to license existing chip designs for which R&D is already complete and licence newer chips which command a significantly higher royalty per chip

Lack of Legitimate Competitors Has had ~95% market share of mobile phone ships for the last 10 years Intel s Atom processor is considered vastly inferior to the ARMv7 and ARMv8 designs, AMD has begun manufacturing chips based on an ARM design Bearish projections have ARM maintaining 85% smartphone, 70% tablet market share while growing strongly in the microcontroller and server sector by 2018 (Strategy Analytics) Christopher Danely (JP Morgan Analyst): We believe Intel should shut down mobile Lack of legitimate competitors positions ARM to fully capitalize on the aforementioned trends to the fullest

Recent News Apple is developing an ARM-powered MacBook AMD to start selling ARM-based server chips later this year

Recent Stock Performance

Finances 5 Year Annual Revenue (Millions) 2009 2010 2011 2012 2013 TTM $494 $631 $760 $930 $1181 $1182 5 Year EBITDA (millions) 2009 2010 2011 2012 2013 TTM $117 $206 $264 $381 $314 $329 5 Year EPS (Diluted) 2009 2010 2011 2012 2013 TTM $0.15 $0.30 $0.38 $0.55 $0.37 $0.40

Finances (cont.) 5 Year Free Cash Flow (Millions) 2009 2010 2011 2012 2013 TTM $140 $267 $281 $210 $445 $428 5 Year Cash and Cash Equivalents (Millions) Dec. 2009 Dec. 2010 Dec. 2011 Dec. 2012 Dec. 2013 Latest Quarter $56 $46 $42 $74 $72 $65

Comps Model

DCF 5 Year Free Cash Flow (Millions) 2009 2010 2011 2012 2013 TTM $140 $267 $281 $210 $445 $428 Growth Slow Moderate Rapid Rate 65% 80% 95% TV 99770 154146 230010 EV 54727 83397 123157 Share Price 52.1 79.53 117.44 FCF projection: 5 Year Free Cash Flow (Millions) 5 Year Free Cash Flow (Millions) 5 Year Free Cash Flow (Millions) 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 $734 $1211 $1998 $3298 $5442 $801 $1441 $2595 $4671 $8408 $868 $1692 $3299 $6434 $12546 *Maturity Growth Rate used: 10% Maturity Yr: 5

Recommendation Time horizon: 2-4 years Price Target: $70 Sell if: A competitor begins to develop a significant alternative for ARM s architecture within the next 1-2 years