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Arm Holdings’ shares dropped over 13% in extended trading following the release of lighter-than-expected earnings guidance for the current quarter and full fiscal year. Despite strong performance in the fiscal first quarter, the company is adjusting its reporting metrics as it transitions towards high-value, lower-volume markets.
In the fiscal first quarter, Arm reported adjusted earnings per share of 40 cents, beating the expected 34 cents, and revenue of $939 million, surpassing the anticipated $902.7 million. The company’s revenue grew 39% year over year, while net income increased to $223 million, or 21 cents per share, from $105 million, or 10 cents per share, in the same quarter last year.
However, Arm maintained its full-year guidance, projecting adjusted earnings per share between $1.45 and $1.65 on revenue ranging from $3.8 billion to $4.1 billion. This forecast aligns with analyst expectations of $1.58 per share and $4.02 billion in revenue. The company noted a slight reduction in expected growth from royalties, with the forecasted range now in the low twenties, down from mid twenties in April.
For the fiscal second quarter, Arm expects adjusted earnings of 23 to 27 cents per share on revenue between $780 million and $830 million, indicating flat growth at the midpoint. Analysts had anticipated 27 cents per share and $804.1 million in revenue.
Royalties revenue, which comes from a percentage of the average selling price or a set amount per chip, reached $467 million, a 17% increase year over year but below the $486.6 million consensus. In contrast, license and other revenue surged 72% to $472 million, exceeding the $418.3 million expectation.
This quarter marks a significant shift for Arm, as the company announced it would no longer report the number of Arm-based chips shipped. CEO Rene Haas and CFO Jason Child explained that the metric is becoming less relevant as the company focuses on high-value markets like data center servers, AI accelerators, and smartphone application processors. In the previous fiscal fourth quarter, Arm reported a 10% year-over-year decline in shipped chips, attributing it to an inventory correction in the industrial IoT sector, characterized by high volume but low-value chips.
To support its strategic pivot, Arm is investing in Arm Compute Subsystems, which aim to reduce development costs and expedite time to market while increasing royalty revenue per chip. The company also secured two high-value Arm Total Access licenses during the quarter, bringing the total to 33.
Additionally, Arm highlighted that Microsoft has begun selling Surface PCs utilizing Qualcomm’s Arm-based chips. Prior to the earnings announcement, Arm’s stock had already surged 93% this year, significantly outpacing the S&P 500 index’s 16% gain.