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Arm Holdings (NASDAQ: ARM), the semiconductor tech firm, released its first earnings report since going public, surpassing analyst expectations with a significant uptick in sales while doubling its profitable licensing segment within a year.
Despite its impressive results, Arm's stock dipped by over 5.5% in early market trading as its revenue forecast failed to meet analyst projections.
Here's a comparison of Arm's performance against the market consensus as provided by LSEG for the second fiscal quarter ending on September 30:
- Adjusted Earnings Per Share (EPS): $0.36 per share
- Revenue: $806 million, against the expected $744.3 million
For the upcoming quarter, Arm anticipates EPS in the range of $0.21 to $0.28 per share, with revenues projected to be between $720 million and $800 million. These figures fall short of Wall Street's forecasts, which forecast earnings at $0.27 per share and revenue between $730 million and $805 million.
Arm also reported a net loss of $110 million, or 11 cents per share, attributing the deficit to over $500 million in one-time stock-based compensation costs following its IPO. Arm projects that stock-based compensation expenses will reduce to between $150 million and $250 million in subsequent quarters. Overall, Arm's total revenue rose by 28% compared to the same period last year.
What impacted Arm’s sales in the September quarter?
Arm's technology is a fundamental component of almost every smartphone, numerous PCs, and a variety of other chip devices. The company reported that in the quarter, over 7.1 billion chips based on Arm's architecture were shipped.
The company generates revenue through royalties—when chip manufacturers pay for the right to fabricate chips that are compatible with Arm's designs, usually as a fraction of the chip's selling price. Additionally, Arm earns income by selling comprehensive licenses for its chip designs, which allow chipmakers to save on development time and resources. This income is recorded as licensing revenue.
During the quarter, Arm's royalty revenue amounted to $418 million, marking a 5% dip compared to the previous year. Conversely, its licensing sales soared to $388 million, more than doubling with a 106% increase from the prior year. This surge suggests that Arm might be successfully upselling advanced technology to its existing clientele, a development that analysts are closely monitoring.
The increase in licensing revenue was credited to a series of multi-year agreements with tech companies, hinting at potential continued growth in this area. However, Arm cautioned that the larger economic landscape could impact the growth of future licensing sales.
In September, Arm transitioned to a public company through an initial public offering. Prior to this, it was a subsidiary of SoftBank, which had intended to sell Arm to Nvidia before the deal was halted by regulatory bodies in 2022. Arm's inception dates back to 1990, with a focus on crafting technology suited for low-power chips.
Arm disclosed that tech giants like Google, Meta (NASDAQ: META), and Nvidia (NASDAQ: NVDA) are among the firms leveraging its technology to create chips capable of artificial intelligence processing.
Is ARM stock a good buy right now?
Out of the 24 analysts covering ARM stock, 16 recommend buy, seven recommend “hold,” and one recommends “sell.” The average target price for ARM stock is $61.86, which is 13.7% higher than the current trading price.
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