Arm Flexes Financial Muscles Post-IPO, But Shares Get A Reality Check

Arm has shown better than expected revenue in its first earnings report since the company's public offering, but its shares fell on a weaker outlook for the quarter ahead.

The Brit chip designer said that revenue for the second quarter of its fiscal 2024, ended September 30, hit $806 million, up 28 percent on the $630 million for the same period last year, exceeding market expectations.

However, operating expenses exceeded gross profit for the quarter, leading to a net loss of $110 million for the smartphone chip supremo.

This didn't stop chief exec Rene Haas from striking an upbeat note in an Arm webcast to discuss the results.

"We are very pleased following the IPO process to kick off our very first quarter as a public company, and the quarter was excellent. We had record revenue fueled by demand for all Arm products, which has driven our licensing numbers up over 100 percent year-on-year," Haas claimed.

This increase in licensing revenue – up 106 percent to $388 million – was propelled by what he termed an "AI R&D supercycle," where people are investing more and more to try to extract some sort of competitive advantage out of AI.

Royalty revenue was down 5 percent to $418 million, which Arm attributed to lower sales of chips into the smartphone market, partially offset by growth in cloud and automotive. The chip designer is now trying to lean in towards these markets as smartphone is regarded as saturated.

The company reported a total of 7.1 billion Arm chips shipped by licensees during the quarter, down from the 7.5 billion shipped during the same period last year.

Looking ahead to the third quarter, which runs to the end of December, Arm said that its projection was for revenue to be in the range of $720-$800 million, slightly less than this quarter and below what analysts were expecting.

The company pointed to uncertainty regarding the exact timing of some deals and that "the revenue recognition profiles for future agreements are subject to change" for this, which pushed Arm's shares down by about 8 percent in trading as investors reacted to the news.

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In its letter to shareholders, Arm insisted that its chip designs are central to the acceleration of AI and machine learning workloads because "all AI algorithms need CPUs to run their models and our strategy is to develop the CPUs and related technologies needed to run these algorithms in the most energy efficient manner."

Arm claimed that during the quarter just ended, it signed multiple licenses for its latest products with companies working on chips requiring advanced AI capability for applications such as autonomous driving, consumer electronics and smartphones.

It picked out "a leading autonomous automotive OEM," which has licensed additional Arm CPU and GPU IP as the manufacturer develops the next generation of its autonomous vehicle platform.

Arm said it signed two additional Arm Total Access agreements during the quarter, whereby licensees pay an annual recurring fee for the right to use a broad swathe of the chip designer's IP. This brings the total number of these deals to 22, which Arm said now includes more than half of its top 20 customers.

In royalty revenue, Arm claimed the smartphone segment was hurt by high levels of chip inventory built up over prior quarters, while cloud-focused designs "grew double-digits," automotive also showed strong growth, but revenue in IoT/Embedded was largely flat. Similar dynamics shaped Qualcomm's recently filed financial results.

Arm's parent, SoftBank, which holds the majority stake in the chip designer, fared even less well, reporting a loss of ¥963.6 billion ($6.3 billion), which it blamed on its investments in other tech companies and outfits such as WeWork, which just filed for bankruptcy. ®