Arm's full-year revenue guidance not raised, key business growth expectations lowered, dropping more than 10% after hours | Financial Report Insights

Chip design giant Arm's performance in the last quarter exceeded expectations, but was affected by a soft market in some areas. The annual sales guidance remains unchanged. The expected growth rate of patent royalty fees, a key business benefiting from the AI-enabled smartphone trend, is lower than previously expected, leading to a significant drop in stock price after hours.

On Wednesday, July 31st, after the U.S. stock market closed, Arm announced its financial data for the first quarter of the 2025 fiscal year ending on June 30, 2024 (referred to as the second quarter), and provided guidance for the third quarter (referred to as the third quarter) and the full year of 2025 (referred to as the full year).

1) Key Financial Data

Revenue: Revenue in the second quarter was $9.39 billion, a 39% year-on-year increase. Analysts expected $9.054 billion, while the company guided $8.75 billion to $9.25 billion, with a 47% year-on-year increase in the first quarter.

EPS: Non-GAAP adjusted earnings per share (EPS) in the second quarter were $0.40, a 67% year-on-year increase. Analysts expected $0.34, while the company guided $0.32 to $0.36, with a 17-fold increase in the first quarter.

2) Segment Revenue

Royalty: Royalty revenue in the second quarter was $4.72 billion, a 72% year-on-year increase. Analysts expected $4.18 billion, with a 37% year-on-year increase in the first quarter.

License: License revenue in the second quarter was $4.67 billion, a 17% year-on-year increase. Analysts expected $4.92 billion, with a 60% year-on-year increase in the first quarter.

3) Performance Guidance

Revenue: The annual revenue guidance remains unchanged at $38.0 billion to $41.0 billion, with analysts expecting $40 billion. For the third quarter, revenue is expected to be $7.80 billion to $8.30 billion, with analysts expecting $8.062 billion.

EPS: The adjusted EPS guidance for the full year remains unchanged at $1.45 to $1.65, with analysts expecting $1.58. For the third quarter, the adjusted EPS is expected to be $0.23 to $0.27, with analysts expecting $0.27.

After the financial report was released, Arm's stock price rose by 8.4% on Wednesday but turned downwards, with a drop of over 10% in after-hours trading.

Annual Revenue Guidance Maintained at Nearly 27% Growth, Royalty Fee Growth Expectation Lowered to Less Than 24%

Arm stated that revenue in the second quarter hit a record high for a single quarter, exceeding the high end of the company's previous guidance, thanks to record-breaking license revenue and strong growth in royalty fees Arm did not raise its annual performance guidance this time, causing concerns among investors about Arm's lack of confidence in its growth prospects.

Based on Arm's guidance range, Arm expects its full-year revenue to grow by 17.5% to 26.8%, lower than the growth levels in the first two quarters of this year. Arm's CEO Rene Haas mentioned that Arm's performance in certain markets has been weak, leading to Arm maintaining its full-year expectations.

Arm's Chief Financial Officer (CFO) Jason Child also told analysts during the earnings conference call that within Arm's revenue guidance range, part of the consideration for royalty fee growth is slightly above 20%, not exceeding 24%, which is lower than the approximately 25% growth rate Arm predicted in April.

The growth in royalty fees for Arm is partly driven by the rapid penetration of Arm v9 mobile architecture, which empowers AI functions with large AI models. In a previous earnings conference call, it was revealed that the royalty fees for phones using the Arm v9 architecture are higher, typically at least double that of equivalent Arm v8 products.

Analysts pointed out last quarter that Arm's licensing business leads the royalty fee business by one to three years. This means that the performance of licensing fees can serve as an indicator of future royalty fee performance.

Financial data shows that in the second quarter, Arm's royalty fees grew faster than expected, almost doubling the growth rate of the first quarter, while licensing revenue was lower than analysts' expectations, growing significantly slower, less than one-third of the first quarter's growth rate.

Arm will no longer disclose the shipment volume of Arm architecture chips starting this quarter

Arm announced alongside its financial report that starting this quarter, it will no longer report the shipment volume of chips based on Arm architecture. Some commentators believe that Arm's decision to no longer disclose the shipment volume of its architecture chips has also impacted Arm's stock price.

CEO Haas and CFO Child wrote in a letter to shareholders:

"We previously considered the chip shipment volume reported by customers as a key performance indicator, as it represented the acceptance of our products by companies using chips in their products (such as our customers' customers). As we shift our focus to higher-value markets with lower volumes, such as data center servers, AI accelerators, and smartphone application processors, reporting chip shipment volume no longer reflects our performance, as royalty fee revenue growth is concentrated on chips with relatively lower quantities."