Strong demand for AI chips, Arm’s quarterly guidance far exceeds expectations, shares surge 5% after hours | Earnings Report News
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Arm released its earnings report after the close on Wednesday, showing that surging demand for AI data center chip designs drove Arm's second quarter results and third quarter guidance to exceed analyst expectations. The company's stock jumped as much as 5% in after-hours trading.
Here are the highlights of Arm’s second quarter earnings report:
Main financial data:
Revenue: Arm’s total revenue for the second quarter was $1.14 billion, up 34% year over year, versus analyst expectations of $1.06 billion.
Operating profit: Adjusted operating profit for Arm’s second quarter was $467 million, versus analyst expectations of $385.5 million.
Gross margin: Adjusted gross margin for Arm’s second quarter was 98.2%, above analyst expectations of 97.9%.
Net profit: GAAP net profit for Arm’s second quarter was $238 million, up 122% year over year; non-GAAP net profit was $417 million, up 32% year over year.
Earnings per share: Under GAAP, Arm’s EPS for the second quarter was $0.22, compared to $0.10 in the same period last year. Non-GAAP EPS was $0.39, above analyst expectations of $0.33 and compared to $0.30 last year.
By business segment:
License revenue: Arm’s license revenue for the second quarter was $515 million, up 56% year over year. The analyst average expectation was $472 million.
Royalty revenue: Arm’s royalty revenue for the second quarter was $620 million, up 21% year over year. The analyst average expectation was $586 million.
Guidance:
Revenue: Arm expects third quarter revenue of $1.18 billion to $1.28 billion. Analysts expected $1.11 billion.
Earnings per share: Arm expects adjusted EPS of $0.41 for the third quarter, above analyst expectation of $0.35.
Arm closed at $160.19 per share on Wednesday, and after the earnings release, the stock rose about 5% in after-hours trading before paring gains. Although the stock is up 30% this year, it still lags other chip stocks that have soared on AI demand optimism.
AI Transformation in Progress
Media reports say Arm’s better-than-expected guidance shows the company is beginning to reap more rewards from its investments in new technologies, aiming to gain a foothold in data centers for artificial intelligence computing.
Last quarter, Arm revealed plans to use part of its profits to develop its own full chips and other components. This plan means Arm is shifting from its traditional business model of providing chip intellectual property to companies like Nvidia and Amazon toward building complete chips themselves.
Under CEO Rene Haas, the company has been transforming, offering more complete chip designs to boost its market visibility and revenue potential.
This transformation requires more engineering and R&D investment, and the resulting higher expenses have eroded profitability. This approach has also intensified competition between Arm and some of its biggest customers. The company is currently embroiled in a fierce legal dispute with Qualcomm.
Haas said to the media:
“There is continued strong demand for this technology from all fields, especially in data centers.”
He also said to the media that Arm’s “Compute Subsystems (CSS)” product line brings in higher royalty income than other designs, and the increase in customers using CSS as well as overall AI spending have driven the company’s optimistic outlook.
CSS products are more complete chip designs that enable companies to complete full chip design faster.
In the interview, Haas said that in the ongoing push toward self-developed chips, Arm has already “advanced a little further.”
“When we think about what is changing for Arm in the data center, we always go back to the huge demand for AI computing—the bottleneck there is power.”
“That’s a good thing for us.”
He also said that revenue from Arm’s Neoverse product line for computers has already doubled.
Strong Demand for Data Center Chips
Arm’s revenue comes from licensing fees for its semiconductor designs and per-chip royalties for every chip using its technology. Chips based on Arm technology generally consume less energy than chips using x86 architecture, such as those from Intel and AMD.
In the second quarter, Arm reported 21% growth in royalty income, with growth in all target markets including smartphones, data centers, and automotive. License revenue surged 56%, mainly due to the timing of high-value contract signings.
Arm designs are used in nearly all smartphones globally. In recent years, the company has been trying to make progress in other markets such as data centers. According to TD Cowen research, chips based on Arm technology generate $200 billion in annual sales for many chip manufacturers.
In a letter to shareholders, Arm said its designs are being used increasingly in data centers and expects Arm-based CPU market share among top hyperscale cloud providers will be close to 50% by 2025.
Alphabet’s Google has used Arm designs in its Axion processors. Haas said these chips perform 60% better than similar Intel or AMD chips at the same power consumption.
Joined OpenAI Stargate Project
More broadly, Arm’s earnings come as investors focus on companies’ returns on AI investment, amid concerns over whether current spending levels are sustainable.
Arm’s major shareholder SoftBank Group is seeking deeper engagement in the AI wave, including participating in OpenAI’s Stargate AI project. Haas told the media that Arm’s products will be part of these projects, but hasn’t fully disclosed which types of chips will be provided.
Arm’s technology first broke through in mobile devices, as the company originally designed its chip architectures for battery-powered environments. As a result, this market has long accounted for most of its revenue. Now, as data centers become more constrained by energy limitations, Arm sees an opportunity in this lucrative sector and is expanding design services for companies like Amazon and Google.
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