AI chip demand is high, Arm's guidance this season greatly exceeds expectations, rising by 5% in after-hours trading | Earnings Report Insights

Arm announced its earnings report after the market closed on Wednesday, showing that driven by a surge in demand for AI data center chip design, Arm's performance in the second fiscal quarter and guidance for the third fiscal quarter both exceeded analysts' expectations, with the company's stock price jumping nearly 5% in after-hours trading.

Here are the key points from Arm's second fiscal quarter earnings report:

Key Financial Data:

Revenue: Arm's total revenue for the second fiscal quarter was $1.14 billion, a year-on-year increase of 34%, compared to analysts' expectations of $1.06 billion.

Operating Profit: Arm's adjusted operating profit for the second fiscal quarter was $467 million, exceeding analysts' expectations of $385.5 million.

Gross Margin: Arm's adjusted gross profit margin for the second fiscal quarter was 98.2%, compared to analysts' expectations of 97.9%.

Net Profit: Arm's net profit under GAAP for the second fiscal quarter was $238 million, a year-on-year increase of 122%; under non-GAAP, the net profit was $417 million, a year-on-year increase of 32%.

Earnings Per Share: Arm's earnings per share under GAAP for the second fiscal quarter was $0.22, compared to $0.10 in the same period last year. Under non-GAAP, the earnings per share was $0.39, higher than analysts' expectations of $0.33, compared to $0.30 in the same period last year.

Segment Data:

Licensing Revenue: Arm's licensing revenue for the second fiscal quarter was $515 million, a year-on-year increase of 56%, compared to the average analyst expectation of $472 million.

Royalty Revenue: Arm's royalty revenue for the second fiscal quarter was $620 million, a year-on-year increase of 21%, compared to the average analyst expectation of $586 million.

Performance Guidance:

Revenue: Arm expects third fiscal quarter revenue to be between $1.18 billion and $1.28 billion, compared to analysts' expectations of $1.11 billion.

Earnings Per Share: Arm expects adjusted earnings per share for the third fiscal quarter to be $0.41, higher than analysts' expectations of $0.35.

Arm's closing price on Wednesday was $160.19. After the earnings report was released, the stock rose about 5% in after-hours trading, although the gains later narrowed. While the stock has risen 30% this year, it still lags behind other chip stocks that have surged due to optimistic AI demand.

AI Transformation in Progress

Media reports indicate that Arm's better-than-expected performance guidance shows that the company is beginning to reap more returns from its investments in new technologies, aiming to secure a place in the data centers used for AI computing.

In the last quarter, Arm disclosed plans to invest part of its profits into developing its own complete chips and other components. This plan signifies a shift for Arm from a long-term business model of providing chip intellectual property to companies like NVIDIA and Amazon to personally creating entire chips Under the leadership of CEO Rene Haas, the company has been transforming to offer more comprehensive chip designs to enhance its market exposure and revenue potential.

This transformation requires more investment in engineering research and development, and the resulting increased expenses have eroded profitability. This approach has also intensified competition between Arm and some of its largest customers. The company is currently embroiled in intense legal disputes with Qualcomm.

In a media interview, Haas stated:

“There is a sustained strong demand for this technology from various sectors, especially in data centers.”

He also told the media that the “Compute Subsystems (CSS)” products sold by Arm can generate higher royalty income compared to the company's other designs, and the increasing number of customers adopting CSS technology, along with the overall rise in AI spending, has driven the company to provide optimistic forecasts.

CSS products belong to a more complete chip design, allowing companies to complete the design of entire chips more quickly.

Haas mentioned in the interview that Arm has “moved forward a little bit” in its ongoing exploration of self-developed chips.

“When we think about what has changed for Arm in data centers, we go back to the huge demand for AI computing—where the bottleneck is power.”

“This is a good thing for us.”

He also noted that revenue from Arm's Neoverse product line for computers has doubled.

High Demand for Data Center Chips

Arm's revenue comes from licensing fees for its semiconductor designs and royalties charged per chip that uses its technology. Chips based on Arm technology typically consume less power than those using x86 architecture (such as those used by Intel and AMD).

In the second fiscal quarter, Arm reported a 21% increase in royalty revenue, with growth achieved across all target markets, including smartphones, data centers, and automotive. Meanwhile, licensing revenue surged by 56%, which the company attributed mainly to the timing of high-value contract signings.

Arm's 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 research by TD Cowen, chips using Arm technology generate $200 billion in sales annually for numerous chip manufacturers.

In a letter to shareholders, Arm stated that its designs are increasingly being applied in data centers, and the company expects that by 2025, the share of Arm architecture in CPUs deployed by leading hyperscale cloud providers will approach 50%.

Google, a subsidiary of Alphabet, uses Arm designs in its Axion processors. Haas stated that these chips outperform similar chips using Intel or AMD technology by 60% at the same power consumption.

Joined OpenAI Stargate Project

On a broader level, Arm's financial report comes at a time when investors are focused on the return on investment of various companies in the AI sector, while the market is concerned that the current level of spending may not be sustainable Arm's major shareholder, SoftBank Group, is trying to delve deeper into the AI wave, including participating in OpenAI's Stargate AI project. Haas stated to the media that Arm's products will be part of these projects, but the company has not fully disclosed what type of chips it will provide.

Arm's technology first made breakthroughs in the mobile device sector, as the company designed chip architectures specifically for battery-powered environments from the very beginning. As a result, this market has long provided the majority of the company's revenue. Now, as data centers face increasingly strict energy constraints, Arm believes it can play a role in this lucrative field and is increasing design services for companies like Amazon and Google