In an unexpected twist that left many investors scratching their heads, Arm Holdings delivered a record-breaking fiscal third quarter, yet the stock plummeted over 10% in after-hours trading, settling at approximately $94 per share. The British semiconductor company reported adjusted earnings of 43 cents per share on a record revenue of $1.24 billion, surpassing analyst expectations of 41 cents and $1.23 billion.
This impressive performance marked a remarkable 26% growth in revenue year-over-year, making it the fourth consecutive quarter for Arm to exceed the $1 billion revenue milestone. It appears, however, that the positive numbers were eclipsed by a less favorable aspect of the report.
AI Demand Fuels Record Royalty Revenue
One of the highlights of the earnings report was the record royalty revenue, which soared to $737 million, representing a 27% year-over-year increase, significantly outpacing the $708 million that analysts had projected. This growth stemmed from robust demand for artificial intelligence computing, with contributions coming from various sectors including data centers, smartphones, and edge markets.
CEO Rene Haas attributed this success to the increasing scale of Arm’s ecosystem, emphasizing its relevance in cloud, edge, and physical environments. The adoption of Arm’s latest Armv9 chip technology, which commands higher royalty rates than its predecessor, has proven to be a critical factor in maintaining leadership in the semiconductor market.
Licensing Revenue Disappoints
While the overall performance seemed stellar, the licensing revenue report revealed weakness that contributed to investor unease. The licensing segment generated $505 million, which, although up by 25% from the previous year, fell short of the anticipated $520 million.
Licensing revenue, which includes upfront fees paid by companies to access Arm’s chip designs, is vital as it serves as a predictor of future royalty streams. This discrepancy raised eyebrows among analysts at Guggenheim Securities, who highlighted concerns about potential declines in smartphone unit sales and broader anxiety regarding the impact of AI on the software sector.
Arm’s roster of customers is a who’s who of the tech world, with companies like Apple and Qualcomm utilizing its chip designs for smartphones, and industry giants such as Microsoft and Nvidia leaning on Arm technology for high-end cloud server processors.
As the company looks ahead, it has issued a forward-looking guidance that projects revenue for the fiscal fourth quarter ending in March to be between $1.47 billion and $1.52 billion, paired with expected adjusted earnings of 58 cents per share. Both figures are above the analyst estimates of $1.44 billion in revenue and 57 cents in earnings.
Despite this optimistic outlook, investors remain cautious. Arm’s stock has experienced a 4% dip year-to-date and a staggering 39% decline over the past year. The management team is soon set to address these results and insights into the business outlook during a conference call scheduled for 5 p.m. today.
