Arm Stock Soars 20% on AI-Powered Earnings Beat and Annual Guidance Raise

Shares of Arm Holdings (ARM 3.78%) soared 19.9% in Wednesday's after-hours trading following the release of a strong fiscal third-quarter report for the leading designer of central processing unit (CPU) chips.

Investors' collective delight is attributable to the quarter's revenue and earnings handily beating Wall Street's consensus estimates, along with management raising its guidance for the full fiscal year to levels solidly above analysts' expectations.

As background, the U.K.-based company held its initial public offering (IPO) in mid-September 2023. So, its fiscal Q3 2024 report, for the period ended Dec. 31, 2023, is its second quarterly report released as a public company, but just its first report that covers an entire period in which it was publicly traded.

Arm's key numbers

Data source: Arm Holdings. GAAP = generally accepted accounting principles.

Investors should focus on the adjusted numbers because they exclude one-time items.

Wall Street was looking for adjusted EPS of $0.25 on revenue of $761.6 million, so Arm easily exceeded both expectations. It also surpassed its own guidance, which was for adjusted EPS of $0.21 to $0.28 on revenue of $720 million to $800 million.

The company generated $310 million in cash running its operations during the quarter, down 25% year over year. On an adjusted basis, the quarter's free cash flow (FCF) fell 35% to $251 million. There's no need to be concerned about these declines, as cash flows can be "lumpy" from quarter to quarter. Moreover, adjusted FCF for the trailing-12-month period increased 63% to $724 million.

Arm ended the fiscal third quarter with cash, cash equivalents, and short-term investments of $2.4 billion, up 9% from the prior quarter and 35% from the year-ago period.

Revenue breakdown

Data source: Arm Holdings. YOY = year over year.

Royalty revenue was a quarterly record, while license revenue was better than management had expected, according to the shareholder letter. The company said royalty revenue growth was driven by "the semiconductor industry recovery and the rapidly increasing penetration of Armv9-based chips, which typically command a higher royalty rate [than the chip's predecessor, Armv8]." And it attributed the growth in license revenue to "strong demand for more advanced Arm CPUs as companies increase investment in AI [artificial intelligence] across all end markets."

What the CEO had to say

Here's CEO Rene Haas' statement in the shareholder letter:

Arm delivered another quarter of record revenues driven by continued adoption of the world's most pervasive compute platform. More customers moving to higher-value Armv9 technology combined with market share gains in cloud server and automotive resulted in strong royalty growth. The AI wave drove licensing growth as these new devices require Arm's performant and power-efficient compute platform.

Guidance

For the fiscal fourth quarter, management guided for:

• Revenue of $850 million to $900 million, which equates to growth of 34% to 42% year over year.
• Adjusted EPS of $0.28 to $0.32, or 1,300% to 1,500% growth.

Going into the report, Wall Street had been modeling for fourth-quarter revenue of $780.3 million and adjusted EPS of $0.21, so Arm's outlook sped by both estimates.

For the fiscal year 2024, management raised its outlook:

• Revenue of $3.155 billion to $3.205 billion, which equates to annual growth of 18% to 20%. Prior guidance was $2.96 billion to $3.08 billion.
• Adjusted EPS of $1.20 to $1.24, or 88% to 94% annual growth. Prior guidance was $1 to $1.10.

Going into the report, Wall Street had been expecting fiscal 2024 revenue of $3.05 billion and adjusted EPS of $1.07, so the company's outlook solidly surpassed both estimates.

In short, Arm turned in a great quarter and its future looks bright, thanks in large part to what Haas called the "AI wave."