Arm Holdings (ARM, Financial) saw a positive start today, rebounding from premarket lows of -7% despite exceeding Q2 top and bottom-line forecasts. The company reported no significant weaknesses, with a recovering smartphone market, strong AI demand, and increased adoption of its latest chips. However, the unchanged FY25 guidance initially disappointed investors seeking a more optimistic outlook.
- Since its IPO last year, ARM has consistently delivered strong earnings and revenue growth. In Q2, ARM reported an adjusted EPS of $0.30 on revenues of $844 million, a 4.7% year-over-year increase.
- The demand for AI has boosted ARM's platform, resulting in a 23% rise in royalty revenue to $514 million in Q2. Smartphone market recovery and increased CPU content per device further contributed to a 40% surge in royalty revenue, despite only a 4% growth in smartphone units.
- ARM's technological edge allows it to run AI from the edge, such as on an iPhone (AAPL, Financial), to the cloud, like in NVIDIA's (NVDA, Financial) Grace Blackwell platform. ARM collaborates with big tech firms, including Meta Platforms (META, Financial), Microsoft (MSFT, Financial), and Google (GOOG, Financial), to optimize its offerings.
- While AI-driven royalty revenue grew, licensing revenue fell by 15% to $330 million, although this was better than the expected 25% decline. ARM's licensing pipeline remains strong, indicating future growth potential.
- ARM maintained its FY25 financial targets, aiming for an adjusted EPS of $1.45-1.65 and revenues of $3.8-4.1 billion. Licensing timing fluctuations influenced this decision, but ARM expects to close all large deals eventually.
AI played a crucial role in ARM's Q2 success, complemented by a gradual smartphone market recovery. Despite doubling year-to-date, ARM's shares trade about 20% below their July all-time highs. Concerns persist over inventory corrections in the semiconductor industry and economic uncertainties in China, which accounts for a significant portion of ARM's revenue.
