Arm Forecasts Q3 Sales Below Wall Street Expectations

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For fiscal 2024, Arm expects revenues to reach $3.02 billion, slightly above analyst expectations.

Semiconductor company, Arm Holdings, provided a fiscal third-quarter sales forecast that fell short of Wall Street expectations due to a significant deal expected to close later than initially anticipated, sending its shares down 8% to $50 in after-hours trading.

Despite this, Arm projected its fiscal full-year sales to surpass expectations, fueled by a surge in chip design activity across companies driven by the artificial intelligence boom. After becoming public again in September following SoftBank Group’s partial share sell-off, Arm now faces challenges related to new accounting rules impacting the revenue recognition from its multi-year licensing agreements.

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Analysts have expressed concern about Arm’s valuation, which was deemed high at over $65 billion post-IPO, especially in relation to its projected annual revenue. Arm Holdings’ chief finance officer (CFO), Jason Child, attributed the cautious third-quarter revenue forecast and more positive full-year outlook to the delay of a significant licensing deal. The complexity and need for high-level approval make such deals difficult to predict. 

Despite a conservative estimate for the current third quarter, Arm’s second-quarter revenues rose by 28% to $806 million, beating estimates and reflecting growth in areas beyond mobile technology, with Nvidia set to use Arm’s tech in competition with Intel.

The company’s earnings primarily come from licensing and royalties from chips made with its IP, with a strategic focus on sectors with higher chip values. While second-quarter royalty revenues were below expectations, licensing revenues were above, and a rebound in royalty growth is expected. Finally, Arm’s net loss of $509 million this quarter was mainly due to IPO-related stock compensation costs, which are estimated to stabilize at $150-200 million per quarter

Ben Bajarin of Creative Strategies noted the good performance in the quarter but raised concerns about Arm’s growth sustainability and understanding of the customer cycle due to the unimpressive guidance.

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