Arm Holdings Sees Stock Rise Following Strong Fiscal Second Quarter

Shares of Arm Holdings (ARM 4.46%) experienced a notable increase today after the chip-design firm announced its fiscal second-quarter results, which were better than expectations. The company's positive performance not only surpassed its own forecasts but also those of analysts.

As of 2:25 p.m. ET, Arm's stock was showing an increase of 4.1% in light of the report.

Growing Demand for Artificial Intelligence

While Arm's growth cooled compared to the previous quarter, this was anticipated due to the expiration of a large licensing deal from the same period last year. For the second quarter ending on September 30, Arm recorded a revenue rise of 5%, reaching $844 million. This figure exceeded its guidance, which ranged between $780 million and $830 million, and also surpassed the analyst consensus prediction of $808.4 million.

The company generates revenue primarily through licensing its chip designs and collecting royalties. These two segments are crucial to Arm's financial structure: licensing and royalties. The royalty segment, being the larger of the two, showed a significant 23% increase, totaling $514 million. This boost was attributed to the growing popularity of Armv9, its newest CPU architecture, which has risen to comprise about 25% of its royalty revenue, up from just 10% a year earlier.

In contrast, license revenue saw a decline of 15%, falling to $330 million as anticipated. Despite this setback, Arm indicated that bookings for the second quarter were strong. The annualized contract value, a key metric for license growth, increased by 13% to $1.25 billion, while remaining performance obligations, which indicate backlog, rose 10% to $2.39 billion.

On the earnings side, adjusted earnings per share fell from $0.36 to $0.30, partly due to the drop in licensing revenue and increased spending on research and development (R&D), as well as sales and marketing efforts after excluding share-based compensation.

In a letter addressed to shareholders, CEO Rene Haas commented on the rising demand for artificial intelligence, noting, "Demand for AI everywhere is increasing the need for more compute and in turn driving our partners to make long-term commitments to more, and more powerful, energy-efficient Arm technology."

Future Outlook for Arm

Looking ahead, Arm's management reiterated its revenue guidance for the fiscal year, projecting between $3.8 billion and $4.1 billion. They also forecasted adjusted earnings per share in the range of $1.45 to $1.65.

For the third quarter, the company anticipates revenue between $920 million and $970 million, with adjusted earnings per share expected to fall between $0.32 and $0.36, which aligns with current estimates. Overall, Arm is poised to benefit from the persistent demand for artificial intelligence, despite experiencing modest revenue growth in this specific quarter.

Jeremy Bowman has no involvement with any of the stocks mentioned. The disclosure policy noted does not include positions in the stocks discussed here.

Stock, Earnings, AI