Arm earnings mostly beat expectations, but chip designer falls short in a key segment

By Emily Bary and Claudia Assis

Arm's stock drops about 11% after royalty revenues come up short

After rallying more than 8% in Wednesday's regular session as part of a broader semiconductor surge, Arm Holdings Plc. shares were set to retreat based on after-hours action.

The chip designer posted largely better-than-expected fiscal first-quarter results but reported a miss on its royalty revenue.

Arm (ARM) posted net income of $223 million, or 21 cents a share, in the quarter, up from $105 million, or 10 cents a share, in the year-earlier period. On an adjusted basis, Arm earned 40 cents a share, while analysts were modeling 34 cents.

The company's revenue came in at $939 million, up 39% from $675 million a year prior. Analysts had been looking for $906 million.

Arm's top-line total included $467 million in royalty revenue, whereas the FactSet consensus was for $492 million.

Revenue from licensing and other sources amounted to $472 million, while analysts were projecting $418 million.

Shares fell about 11% in the extended session Wednesday.

Analysts noted last quarter that Arm's licensing business leads the royalty business, suggesting that licensing performance can be an indicator of future royalty performance.

That topic also came up on Arm's earnings call Wednesday, with management noting an uptick in licensing momentum, thanks to artificial intelligence.

"From the time that we license a piece of IP to a customer, and from the time that they put that into a chip, and that chip goes into an end system, and then ultimately into the customer's hands, can be anywhere between three and four years, and in some cases even longer," management said on the earnings call, according to a transcript provided by AlphaSense.

Licensing "is a very, very good predictor of further royalty growth," according to Arm.

The company kept its overall guidance for the year at between $3.8 billion and $4.1 billion.

Arm's stock was the subject of an analyst downgrade earlier this week, as HSBC expressed caution about the stock's premium valuation and "short-term earnings downside risk given a potential slowdown in Android smartphone momentum and a less bullish AI narrative than previously expected."

Read: Why Arm's stock just got a downgrade after its big rally

Shares of Arm had nearly doubled on a year-to-date basis through Wednesday's close. The company re-emerged on the public market in September.

-Emily Bary -Claudia Assis

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07-31-24 2017ET

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