Arm Holdings surged 22 per cent in after-hours trading after the British tech company forecast fiscal fourth-quarter sales and adjusted profit above Wall Street expectations as customers aim to design new chips for artificial intelligence work, generating higher royalties.
Arm's forecast ranges for its fourth quarter had midpoints of $875 million for sales and 30 cents per share for adjusted earnings, above estimates of $780.3 million and 21 cents per share, according to LSEG data.
Arm raised its guidance by roughly $100 million because markets such as automotive and AI are going to be strong in the fiscal fourth quarter, finance chief Jason Child told Reuters.
The company expects licensing revenue for chips that power AI in data centers, phones and PCs to be a significant factor.
"The solid Arm earnings and, even more importantly, their robust forecasts are good signs for both the company and the tech industry overall," said Bob O'Donnell, president and chief analyst at TECHnalysis Research.
For the full fiscal year, Arm expects $3.18 billion in revenue and adjusted earnings of $1.22 per share, both above analysts' estimates of $3.05 billion and $1.07 per share.
"We're seeing more interest in newer designs and newer technologies by customers" due to interest in AI, Child told Reuters. "It's real. Folks are actually buying and licensing that technology."
For the fiscal third quarter, Arm reported sales of $824 million and adjusted earnings of 29 cents per share, topping Wall Street estimates of $761.6 million and 25 cents per share.
Arm, which is still majority-owned by Japan's SoftBank Group after a public listing last year, creates intellectual property that underlies most of the world's smartphone chips.
The company has also expanded into laptops, where customers such as Qualcomm and Nvidia plan to use its technology for forthcoming chips, and data centers, where Microsoft and Amazon.com now offer Arm-based central processors to developers via their cloud computing businesses.
Arm makes money via licensing deals for its intellectual property and a royalty charged for each chip sold that uses its technology. The company's $75 billion valuation on just over $3 billion in expected fiscal 2024 revenue - a multiple higher than any other firm in the chip industry - rests on its stated plan to obtain far higher royalties per chip than it has historically.
After a smartphone slump in 2023 that caused Arm sales to contract, analysts expect Arm revenue to expand in 2024 as consumers look to upgrade smartphones and laptops for new generative artificial intelligence services such as chatbots.
Many of the chips in those devices will use the ninth generation of Arm's core chip architecture, for which the company is charging higher royalty rates than previous versions.
