ARM: Guidance cools down, AI faith encounters challenges

ARM (ARM.O) released its fiscal year 2025 first-quarter report (ending in June 2024) after the U.S. stock market on the morning of August 1, 2024, with the following key points:

1. Overall Performance: Revenue & Profit, Better Than Market Expectations. In the first quarter of the 2025 fiscal year (24Q2), ARM achieved revenue of $939 million, a year-on-year increase of 39.1%, slightly better than market expectations ($905 million). The continuous growth in revenue was mainly due to the rapid growth of the licensing business; the company's gross profit margin this quarter was 96.5%, an increase of 1.1 percentage points year-on-year, better than market expectations (95.9%), maintaining a high gross profit margin level of over 95%.

2. Business Segments: Continued Growth in Licensing Business. Driven by demand for AI, the number of licensing customers continued to increase, with the total number of customers reaching 274 this quarter. Royalty licensing business growth rate declined this quarter. Growth mainly came from the recovery of demand in the mobile phone market, while IoT/embedded revenue declined due to inventory adjustments.

3. ARM Performance Guidance: $Arm(ARM.US) The expected revenue for the second quarter of the 2025 fiscal year (24Q3) is $780-830 million (market expectation $806 million) and adjusted earnings per share of $0.23 to $0.27 (market expectation $0.27).

Dolphin's Overall View: ARM's financial report is good, but the guidance is somewhat disappointing.

In this financial report, both the company's revenue and profit exceeded market expectations. Quarterly revenue continued to grow, and profit remained above $200 million, mainly due to the strong performance of the licensing business.

However, the company did not provide better-than-expected guidance for the next quarter: expected revenue of $780-830 million (market expectation $806 million) and adjusted earnings per share of $0.23 to $0.27 (market expectation $0.27). Both revenue and profit declined compared to the previous quarter, and no better expectations were given under the AI boom.

After-hours, ARM experienced a double-digit drop, mainly due to the impact of the company's full-year guidance. Although the data for this quarter exceeded expectations, the company did not raise its full-year guidance ($3.8-4.1 billion revenue target). In particular, the company lowered its full-year royalty income expectations, reducing the growth rate from around 25% to around 22%

While major companies are increasing their capital expenditures, ARM has not raised its full-year operating targets as scheduled. The company's current stock price corresponds to a PE ratio of over 100 times, mainly due to the support of AI faith. In the comparison of cold and warm factors, the company's full-year guidance directly affects the market's confidence in the company.

Here is Dolphin's specific analysis of ARM:

I. Overall Performance: Revenue & Profit, Better Than Market Expectations

1.1 Revenue

In the first quarter of the 2025 fiscal year (24Q2), ARM achieved revenue of $9.39 billion, a year-on-year increase of 39.1%, slightly better than market expectations ($9.05 billion). The company's revenue continued to rise this quarter, mainly due to the rapid growth of the licensing business.

1.2 Gross Profit

In the first quarter of the 2025 fiscal year (24Q2), ARM achieved a gross profit of $9.06 billion, a year-on-year increase of 40.7%. The growth rate of gross profit is slightly higher than that of revenue.

ARM's gross profit margin in this quarter was 96.5%, up 1.1 percentage points year-on-year, better than market expectations (95.9%). The gross profit margin continues to remain high at over 95%.

1.3 Operating Expenses

In the first quarter of the 2025 fiscal year (24Q2), ARM's operating expenses were $724 million, a year-on-year increase of 35.8%. The company maintains high investment and continues to expand its research and development team.

Specific breakdown of expenses:

1) Research and Development Expenses: The company's R&D expenses this quarter were $485 million, a year-on-year increase of 43.9%. Due to business development, the company continues to increase R&D investment, with current R&D investment accounting for 51.7%. This quarter, the company continued to hire engineers, with the number increasing to 6,102, accounting for 83.4% of the total.

2) Sales and Administrative Expenses: The company's sales and administrative expenses this quarter were $239 million, a year-on-year increase of 21.9%. With the expansion of revenue this quarter, sales expenses slightly increased.

1.4 Net Profit

In the first quarter of the 2025 fiscal year (24Q2), ARM achieved a net profit of $2.23 billion, a year-on-year increase of 112.4%, better than market expectations ($1.82 billion). The net profit margin for this quarter was 23.7%

If we simply look at the operational situation, the company's operating profit for this quarter has increased to $182 million, which is close to market expectations.

The growth in operating profit mainly comes from the increase in revenue and gross profit margin. However, due to the company's continuous investment in research and development, the operating profit did not increase significantly.

II. Business Segmentation: Licensing Business Continues to Grow

Looking at ARM's business segments, the licensing business and royalty business are approaching a 55-45 split this quarter. The company's business is currently benefiting mainly from the demand for AI, with royalty revenue accounting for 50.3% this quarter. Licensing business accounts for 49.7%.

2.1 Licensing Business

ARM's licensing business achieved revenue of $472 million in the first quarter of the 2025 fiscal year (24Q2), a year-on-year increase of 71.6%. With the growth in demand for AI, more downstream customers are adopting ARM to develop chips .

The number of full license customers and flexible license customers increased this quarter. The number of full license customers increased to 33, while the number of flexible license customers increased to 241, showing a continuous increase in the company's overall customer base.

2.2 Royalty Business

ARM's royalty licensing business achieved revenue of $467 million in the first quarter of the 2025 fiscal year (24Q2), a year-on-year increase of 16.8%. The growth in royalty licensing business is mainly attributed to the contribution of smartphones, the increased penetration of Armv9, and the overall market recovery. Growth in the automotive sector is driven by the application of more advanced chips, while the IoT/embedded business declined year-on-year due to inventory adjustments .

Dolphin Research on ARM and Related Companies

Financial Report Review on May 9, 2024: "ARM: Is AI Slowing Down After the Celebration?" Financial Report Review on February 8, 2024: "ARM: Wings of AI, how long can it fly?"

In-depth analysis of ARM on September 13, 2023: "ARM: After selling to Alibaba, is SoftBank's next lifeline really worth 50 billion?"

Related Companies

Intel conference call on January 26, 2024: "Intel 3, is it an opportunity? (Intel 23Q4 conference call)"

Financial Report Review of Intel on January 26, 2024: "Intel: No longer on the throne of processors, AI battle ends in defeat"

Risk Disclosure and Statement of this article: Dolphin Research Disclaimer and General Disclosure