Sellers remain in control of Arm Holdings plc (ARM, Financial) despite the CPU architecture provider surpassing Q1 earnings and revenue estimates. The dissatisfaction stems from ARM reiterating its FY25 guidance, even though it outperformed expectations in Q1. ARM's FY25 growth estimate for royalty revenue, derived from Armv9 and Armv8 architecture, was lowered to the low-20% range from the mid-20% range. Additionally, ARM decided to stop reporting the number of Arm-powered chips its customers ship, citing a shift toward higher-value, lower-volume markets like data centers, making the figure less representative of royalty revenue growth.
What is keeping ARM from hiking its FY25 forecast?
The ongoing inventory correction across the IoT and networking markets is more stubborn than initially thought. ARM expects Q2 to mark a low point for revenue this year, giving the company less room for further growth. This forces ARM to stay prudent in its FY25 financial targets, including adjusted EPS of $1.45-1.65 and revenues of $3.8-4.1 billion. The market was hungry for a better FY25 forecast, keeping shares significantly lower today.
AI fueled ARM's upbeat Q1 numbers, including adjusted EPS of $0.40 and revenues of $939 million, a 39.1% year-over-year jump. The healthy top line was supported by a record 72% leap in license revenue and a 17% improvement in royalty revenue, reflecting further adoption of the v9 architecture, which comprised a quarter of overall royalty revenue, up 5 points from last quarter.
CEO Rene Haas noted that AI is everywhere now, sustaining demand for ARM's power-efficient platform. Given the power requirements of AI, efficiency may drive demand away from traditional x86 architecture, primarily used by Intel (INTC, Financial) and Advanced Micro Devices (AMD, Financial). ARM's technological advantage was showcased in Q1, with continued market share capture in automotive and cloud service providers.
Market share gains were partially offset by persistent weakness in IoT and networking equipment. Several of ARM's semiconductor peers warned of slowdowns in these markets, surprising investors with the trend's impact on ARM's outlook.
AI continues to drive considerable growth for ARM. The company boasts several technological advantages that can capitalize on a long-term AI-induced tailwind. However, a more persistent-than-expected inventory correction has significantly impacted ARM's performance today.
