Arm Holdings outlook disappoints Wall Street, shares dive 9%

By Max A. Cherney

Chip designer Arm Holdings (ARM) on Wednesday set a revenue forecast in line with Wall Street targets, disappointing investors used to rosier outlooks by the company’s rivals in the era of artificial intelligence.

Shares fell 9% after hours. They had climbed more than 90% this year, and closed up 8.4% on Wednesday, following an optimistic report by AMD.

For the current fiscal second quarter, Arm forecast revenue in a range between $780 million and $830 million, compared with an average analyst estimate of $804.1 million, according to LSEG data. The company left its full-year guidance unchanged.

“Despite Arm Holdings’ impressive earnings beat, their cautious (lukewarm) full year forecast has dampened spirits,” said Michael Schulman, chief investment officer of Running Point Capital.

“Arm is still benefiting from the artificial intelligence spending explosion, but weakness in other markets, possibly from inventory gluts has caused management to temper lofty expectations.”

Arm reported a 39% surge first-quarter revenue, to $939 million, exceeding analyst estimates of $902.7 million. The UK chip designer reported first-quarter earnings of 40 cents per share, adjusted for stock-based compensation, among other things. Analysts expected earnings of 34 cents a share.

Arm generates revenue from licensing fees for semiconductor designs and collects a royalty for each chip sold that uses its technology. Unlike chipmakers such as Nvidia and Advanced Micro Devices, Arm does not see an immediate benefit from designs geared toward generative AI. It can take years to realize the windfall from designs it licensed this year.

The boost in revenue was largely because of a “handful” of significant licensing deals the company signed, even though its royalty revenue suffered from several weak end markets, Chief Financial Officer Jason Child said in an interview with Reuters.

Licensing deals were boosted by the tremendous appetite for the silicon necessary to power artificial intelligence applications.

“We’re seeing more investment (in AI) than we saw even 90 days ago,” Child said.

Since its IPO last year, Arm has begun to sell designs that are nearly pre-built, so customers can more quickly build a chip. Those deals are lucrative at the initiation stage but Arm stands to make more in royalties when the customers ships its products, which could take months or years.

Child said Arm has seven such customers and will see some royalties from them in the fourth quarter this year, but “next year it’s gonna become meaningful.”

Revenue from China dipped to roughly 13% of total sales, when it often accounts for 20% or more a quarter. Royalties in China grew 114% but its licensing business shrank 68% during the quarter.

Arm’s designs power nearly every smartphone in the world, and the company has attempted to make headway in data centers and other markets. Chips with Arm technology generate $200 billion a year of revenue for the many chipmakers that sell them, according to research from TD Cowen.

Bets that Arm will benefit from a surge in artificial-intelligence computing have nearly tripled the chip designer’s share price since its initial public offering last September, giving it market value of about $140 billion. The shares recently traded at roughly 75 times expected earnings, compared with about 31 times earnings for heavyweight chipmaker Nvidia, according to LSEG data.

Though Arm’s designs are found adjacent to chips that power AI applications, the company’s revenue and profit have not benefited from AI to the same degree as Nvidia’s.

(Max Cherney in San Francisco; Editing by David Gregorio)