Earnings Digest | Shares plunged 10.5%, ARM collapsed!
$ARM Holdings Ltd(ARM)$ unveiled its fiscal Q1 2025 earnings (corresponding to Q2 this year) yesterday, and the stock price plunged 10.5% after hours!
Q1 report exceeded market expectations!
ARM' s revenue was $939 million for Q1, a 39.1% increase year-on-year, exceeding the upper limit of $925 million guidance given by management. Non-GAAP EPS of $0.4, also exceeded the expected $0.36.
Looking ahead to FY2025, ARM kept its revenue forecast steady at $3.8 billion to $4.1 billion, and EPS projections unchanged.
In summary, ARM's Q1 report exceeded market expectations!
But investors had sky-high hopes for ARM, and some metrics fell short, coupled with no uplift in FY2025 guidance, prompting a sell-off.
What can you do? ARM's shares have soared 74% this year. Slight misses in earnings? Expect a plunge – we've seen it play out with $ASML Holding NV(ASML)$ and other semi firms.
Segments Revenue
So, how did ARM's report really fare? What does the future hold?
Let's start with revenue, which was $939 million in the first quarter, up 39.1% year-over-year:
By segment, Royalty revenue hit $467 million, up 16.8% year over year and slightly below analyst expectations of $483 million, driven by continued adoption of Armv9 and a recovery in the smartphone market.
License and Other revenue soared 71.6% YoY to $472 million, up 71.6% year over year and exceeding analyst expectations of $421 million:
ARM's licensing and other revenue is a one-time expense, which is greatly affected by large orders, unstable, and the growth rate is high and low, which is difficult to predict.
Moving forward, ARM eyes Q2 revenue of $780 million to $830 million, compared with analyst expectations of $806 million. Royalty growth projected at 20% (vs. 25% earlier), held back by slower-than-expected inventory draws in networking, industrial, and IoT.
License growth also targeted at ~20%. Expected adjusted earnings per share of 23 cents to 27 cents, while analysts expected 27 cents!
The future of ARM is very attractive!
Although the quarterly report was slightly flawed, the future of ARM is very attractive!
Take a look at the ARMv9 architecture, which is a major update ARM introduced a year ago, and after its release, v9's share of royalties has been increasing, reaching 25% in the first quarter, up from 20% in the previous quarter:
The V9 architecture is more expensive than the v8; for example, in the first quarter, smartphone royalty revenue increased by 50% year-over-year, while the number of units increased by only single digits.
With Armv9's rising influence, ARM's got legs to leap.
In addition to the dividends brought by product upgrades, ARM has also consumed dividends in the AI era, such as the application of ARM architecture in the field of data centers, such as a year and a half ago, $NVIDIA Corp(NVDA)$ integrated CPUs based on ARM architecture into the Hopper GPU, with the next generation of advanced platform Grace Blackwell is about to ship. Production is expected to be higher than Grace Hopper!
In the past few months, $Alphabet(GOOG)$ $Alphabet(GOOGL)$ and $Microsoft(MSFT)$ have both announced their first ARM-based data center chips!
ARM architecture also emerged in the field of AI PC, AI PC equipped with ARM architecture has been sold in the second quarter of this year, there will be more AI PCS using ARM architecture in the future, mainly due to strong computing power and energy saving advantages, management expects that in the next 5 years, ARM's market share in Windows could exceed 50%!
From the perspective of the application field of ARM architecture, in 2016, most of ARM's revenue came from mobile terminals. Now, in addition to mobile phones, ARM earns revenue in various markets such as consumer electronics, IoT, autonomous driving, and cloud computing, and the revenue structure is greatly optimized:
ARM has previously said that revenue growth in fiscal years 2026 and 2027 can reach at least 20%!
The long-term outlook's solid, but valuations are a concern. Even after yesterday's dip, ARM's price-to-sales ratio stands at a lofty 42x, topping even NVIDIA's.
Great companies need fair prices. Excessive valuations mean any earnings hiccup triggers a meltdown!
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