Arm’s Third Quarter Earnings Beat Estimates and Forecast Strong Profits for the Current Quarter

Arm Holdings plc, a leading designer of microprocessors and chip architecture, reported its fiscal third-quarter earnings on February 7, 2024, which surpassed analysts’ expectations and provided a strong profit forecast for the current quarter. The company’s shares soared as much as 41% in extended trading following the announcement.

In the quarter ending December, Arm reported earnings per share of 29 cents adjusted, compared to the consensus estimate of 25 cents from LSEG. The company’s revenue came in at $824 million, exceeding the expected $761 million. For the fiscal fourth quarter, Arm expects earnings per share to range between 28 cents and 32 cents on sales of $850 million to $900 million. Analysts anticipate earnings of 21 cents per share on sales of $780 million.

Arm’s net income for the quarter was $87 million, or 8 cents per share, representing a 14% increase in total revenue from the previous year. The company generates revenue through royalties, which are paid by companies for access to build Arm-compatible chips, typically amounting to a small percentage of the final chip price.

Arm reported that its customers shipped 7.7 billion Arm chips during the September quarter, the most recent period for which figures are available. The stock rose as high as $108.89 in after-hours trading but later slipped below $100. It closed on Wednesday at $77.01.

Royalty revenue increased 11% on an annual basis to $470 million. The growth was attributed to a recovery in the smartphone market and increasing sales to automotive companies and cloud providers. Arm anticipates that growth will continue to be driven by royalty revenue.

In recent years, Arm has shifted its focus towards its licensing business, selling access to more complete designs that semiconductor companies can plug into their planned chips. This process saves chipmakers time and effort and is more lucrative for Arm than simply collecting royalties. Arm’s license and other revenue was $354 million, up 18% year over year. The company reported that more companies were choosing to license its CPU designs to run artificial intelligence, and that the company charges higher licensing fees for advanced designs.

Arm, which was previously owned by SoftBank, went public in September 2023. The company was founded in 1990 to develop technology for low-power chips but gained significance in the overall technology industry when the Apple iPhone and competing Android devices standardized on Arm-based chips. Arm claims that companies including Apple, Google, Microsoft, and Nvidia use its technology.

The company’s strong earnings report and optimistic forecast come amid a challenging economic environment, with concerns over inflation, rising interest rates, and geopolitical tensions. Despite these challenges, Arm’s robust financial performance and continued growth in its licensing business position the company well for the future.

In conclusion, Arm’s fiscal third-quarter earnings report exceeded expectations and provided a strong profit forecast for the current quarter, leading to a significant increase in the company’s share price. The growth in royalty revenue and the shift towards licensing have positioned Arm for continued success in the technology industry.