Arm Stock Drops 10% Despite Record Revenue and Earnings Beat

TLDR

• Arm Holdings reported adjusted earnings of 43 cents per share on record revenue of $1.24 billion, beating analyst expectations of 41 cents and $1.23 billion
• Royalty revenue hit a record $737 million, up 27% year-over-year, driven by AI computing demand across data centers, smartphones, and edge markets
• Licensing revenue of $505 million came in below analyst expectations of $520 million, contributing to investor concerns
• The stock dropped over 10% after hours despite the earnings beat, with shares down 39% over the past 12 months
• Arm issued strong guidance for Q4, forecasting $1.47 billion in revenue and 58 cents per share earnings, both above analyst estimates

Arm Holdings delivered a record-breaking quarter but investors weren’t impressed. The chip designer’s stock fell more than 10% in after-hours trading Wednesday, dropping to around $94 per share.

The British semiconductor company posted adjusted earnings of 43 cents per share on revenue of $1.24 billion for its fiscal third quarter ending in December. Both numbers topped Wall Street’s expectations of 41 cents and $1.23 billion.

Arm Holdings plc American Depositary Shares, ARM

Revenue jumped 26% from the same period last year. This marked the company’s fourth consecutive quarter above $1 billion in revenue.

AI Demand Drives Record Royalty Revenue

Royalty revenue reached a record $737 million, up 27% year-over-year. Analysts had expected $708 million.

The growth came from multiple markets. Data centers, smartphones, and AI applications all contributed to the increase.

The company’s Armv9 chip technology generates higher royalty rates than its previous version. This newer technology is gaining traction with major customers.

Licensing Revenue Misses Expectations

The weak spot in the report came from licensing revenue. The segment brought in $505 million, up 25% from last year but below the $520 million analysts expected.

Licensing revenue includes upfront fees companies pay to access Arm’s chip designs. This metric matters because it signals future royalty streams.

Guggenheim Securities analysts suggested the stock drop reflected concerns about smartphone industry units next year. They also noted broader investor worries about AI’s impact on the software sector.

Arm’s customer base includes major tech players. Apple and Qualcomm license its chip designs for smartphones.

Microsoft and Nvidia use Arm’s technology for high-end cloud server processors. The company is making headway in this lucrative market.

For the current fiscal fourth quarter ending in March, Arm projects revenue of $1.47 billion, plus or minus $50 million. The company expects adjusted earnings of 58 cents per share, plus or minus 4 cents.

Both forecasts exceed analyst estimates of $1.44 billion in revenue and 57 cents per share in earnings. Arm’s ADR stock is down 4% this year and has fallen 39% over the past 12 months.

Company executives planned to discuss the financial results and business outlook at a conference call at 5 p.m. Wednesday.

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