Semiconductor firm Arm , previously owned by SoftBank (TYO:9984) and now listed on NASDAQ as Arm Holdings (NASDAQ:ARM), reported its first post-IPO earnings on November 8, 2023. The company surpassed sales expectations with a total revenue of $806 million, exceeding the expected revenue of $744.3 million and analysts' forecast of $740 million. This marked a significant increase from last year's $630 million. The record revenue since going public in September is attributed to a robust diversified business model, aggressive AI investment, and the rising demand for high-performance CPUs in various AI applications.
However, despite these robust figures, the company's shares dipped over 3% in regular trading and experienced a further 4.8% postmarket dip, resulting in an overall decline of over 7.52%, trading at a price of $52.31 due to lower-than-anticipated revenue forecasts for the current quarter and uncertainties around deal timings and future revenue profiles.
On November 9, Arm's CFO Jason Child projected lower third-quarter fiscal 2023 sales due to delayed licensing deals, which triggered an 8% drop in share price and failed to meet Wall Street expectations. This comes after Arm reported an adjusted earnings per share (EPS) of $0.36 for Q2 before accounting for costs like the one-time share-based compensation payment tied to its IPO, outpacing analysts' estimate of 26 cents per share and FactSet consensus of 26 cents.
However, CEO Rene Haas revealed a disappointing Q4 sales forecast due to a smartphone market slump and uncertain timing for reporting revenues from new licensing deals. The projected Q4 revenue of US$720 million to US$800 million falls short of the analysts' estimate of US$773 million, triggering a stock price drop that threatens to wipe out all gains since IPO. The company expects earnings per share between 21 and 28 US cents for the current quarter, lower than analysts' prediction of 27 cents.
The full-year revenue forecast for FY2024 is between $2.96 billion and $3.08 billion, with a non-GAAP fully diluted EPS from $1 to $1.10. However, despite the disappointing Q3 sales forecast, Arm anticipates fiscal 2024 revenues will surpass $3.02 billion, driven by the artificial intelligence boom and increased chip design activity.
Arm's chips, integral to smartphones, are witnessing reduced demand as phone shipments slow down and consumers hang onto older models longer. The firm's licensing business saw significant growth over the past year, doubling in size and contributing to a 28% annual increase in total revenue. This growth was reflected in licensing sales, which soared by 106% to $388 million, thanks to long-term tech partnerships.
Conversely, royalty revenue declined by 5%, amounting to $418 million, due to dwindling smartphone chip sales. Despite this decline, management anticipates potential royalty revenue uplift from semiconductor industry recovery but acknowledged an unclear trajectory due to macroeconomic elements.
Over the course of the quarter, more than 7.1 billion Arm-based chips were shipped. These chips are integrated into a variety of devices including smartphones and PCs, underscoring the company's broad market reach. Furthermore, Arm has seen market share gains in automotive and cloud compute driven by its Armv9 technology.
Despite exceeding revenue expectations, Arm experienced a net loss of $110 million due to a one-time share-based compensation worth over $500 million triggered by its IPO at Nasdaq in New York on September 14. The company projects this compensation to be between $150 million and $250 million in future quarters.
In 2022, a proposed sale of Arm to Nvidia (NASDAQ:NVDA) was blocked by regulators. Today, after a halted acquisition by Nvidia, Arm's IPO aligns with its low-power chip technology mission. It now collaborates with major tech companies like Google (NASDAQ:GOOGL), Meta (NASDAQ:META), and Nvidia on AI-capable chips. BofA analysts highlighted Nvidia among other companies likely to benefit from this trend.
Arm's IPO was notably successful, raising over $4.8 billion and seeing a share price surge of 25% within hours of going public. However, the company now faces challenges from new accounting rules impacting revenue recognition from multi-year licensing agreements. Analysts have expressed concern over the company's high post-IPO valuation of over $65 billion.
CEO Rene Haas commended Arm's solid start as a publicly-traded company, attributing the record revenue to business diversification and expanding investment in AI-driven markets. He emphasized the unique combination of performance and power efficiency that Arm's technology offers, which is driving its penetration across all markets. Despite Arm not being a traditional chipmaker, Haas sees an overall increase in customer agreements and expects pending deals to close by Q4.
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