ARM: Is AI slowing down after the carnival?
ARM (ARM.O) released its fourth quarter report for the fiscal year 2024 (ending in March 2024) after the US stock market on the morning of May 9, 2024, Beijing time, with the following key points:
1. Overall Performance: Revenue growth without profit growth. In the fourth quarter of the 2024 fiscal year (24Q1), ARM achieved revenue of $928 million, a year-on-year increase of 46.6%, exceeding market expectations ($875 million). The continuous growth in revenue was driven by the dual effects of the licensing business and royalty business; the gross profit margin of $Arm(ARM.US) this quarter was 95.6%, a slight decrease of 0.1 percentage points year-on-year, basically in line with market expectations (95.7%), maintaining a high gross profit margin level of over 95%.
2. Business Segments: Licensing & Royalties continue to grow. Driven by demand for AI and other technologies, the number of ARM's licensing customers continued to increase. Although the number of ARM licensed chips declined due to the semiconductor cycle, the licensing fee per chip increased by 53.1% year-on-year.
3. ARM Performance Guidance: Expected revenue of $875-925 million for the first quarter of the 2025 fiscal year (24Q2) (market expectation $868 million) and adjusted earnings per share of $0.32 to $0.36 (market expectation $0.29) .
Dolphin's overall view:
Overall, ARM's financial report this time is average. Looking at the data, both revenue and profit exceeded expectations, which seems good. However, upon closer inspection, the company's increased research and development expenses have squeezed some of the profits, resulting in a decline in operating profit on a quarter-on-quarter basis. From an operational perspective, the company's performance this quarter is characterized by revenue growth without profit growth.
Looking at the guidance provided by the company: Expected revenue of $875-925 million for the first quarter of the 2025 fiscal year (market expectation $868 million) and adjusted earnings per share of $0.32 to $0.36 (market expectation $0.29) . Compared to the original market expectations, it seems good. However, considering the data for this quarter, the company has already achieved revenue of $928 million and earnings per share of $0.36. By providing this guidance now, it indicates a risk of a quarter-on-quarter decline in the company's performance in the next quarter . For the company, the market itself is positioned as a growth stock driven by AI. However, from the current company performance and guidance, there is currently no confidence in the market response. There is a risk of decline in the guidance for the next quarter, and the full-year guidance is also mediocre. The company's weak expectations may be difficult to support the current valuation of nearly 100 times.
Here is Dolphin's specific analysis of ARM:
I. Overall Performance: Revenue Growth Without Profit Growth
1.1 Revenue
In the fourth quarter of the 2024 fiscal year (24Q1), ARM achieved revenue of $928 million, a year-on-year increase of 46.6%, exceeding market expectations ($876 million). The company's revenue continued to rise this quarter, reaching a new high, benefiting from the dual drive of licensing business and royalty business.
1.2 Gross Margin
In the fourth quarter of the 2024 fiscal year (24Q1), ARM achieved a gross profit of $887 million, a year-on-year increase of 46.4%. The growth rate of gross profit is close to that of revenue.
ARM's gross margin for this quarter was 95.6%, a year-on-year decrease of 0.1 percentage points, basically in line with market expectations (95.7%). The gross margin continues to remain above 95%.
1.3 Operating Expenses
In the fourth quarter of the 2024 fiscal year (24Q1), ARM's operating expenses were $865 million, a year-on-year increase of 31.9%. 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 research and development expenses this quarter were $584 million, a year-on-year increase of 53.3%. Due to business development, the company continues to increase research and development investment, with the current research and development investment ratio reaching 62.9%. The company continued to recruit engineers this quarter, with the number increasing to 5,887, accounting for 83% of the total.
2) Sales and Administrative Expenses: The company's sales and administrative expenses this quarter were $281 million, a year-on-year increase of 2.6%. With the expansion of revenue this quarter, sales expenses slightly increased.
1.4 Net Profit
In the fourth quarter of the 2024 fiscal year (24Q1), ARM achieved a net profit of $224 million, with significant improvements year-on-year/quarter-on-quarter, outperforming market expectations ($145 million) Net profit margin for this quarter is 24.1%.
Although the company's profit margin for this quarter is better than expected, the operational profit performance is actually quite average. Benefiting from business development, the company has added more than 300 engineers quarter-on-quarter. The increase in R&D expenses has squeezed the company's profit, with the operational profit for this quarter being only $22 million, a decrease of approximately $110 million quarter-on-quarter. Compared to the previous quarter, the company grew, but the operational profit decreased.
II. Business Segmentation: Licensing & Royalties, Continue 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 mainly driven by demand for AI, with royalties accounting for 55% of revenue this quarter. Licensing business accounts for 45%.
2.1 Licensing Business
ARM's licensing business achieved revenue of $4.14 billion in the fourth quarter of the 2024 fiscal year (24Q1), a year-on-year increase of 59.8%. With the growth in demand for AI, more downstream customers are adopting ARM to develop chips.
The number of full licensees and flexible licensees increased this quarter. The number of full licensees increased to 31, while the number of flexible licensees increased to 222, with the overall number of customers continuing to rise.
2.2 Royalty Business
ARM's royalty licensing business achieved revenue of $5.14 billion in the fourth quarter of the 2024 fiscal year (24Q1), a year-on-year increase of 37.4%. The growth in royalty licensing business is mainly due to the increase in average price.
Breaking it down:
1) Number of ARM chips: The number of ARM chips used this quarter was 7 billion, a 10.3% decrease year-on-year. Due to the semiconductor cycle impact, the number has been declining in recent quarters;
2) Average royalty per chip: The average royalty per ARM chip this quarter was $0.0734, a 53.1% increase year-on-year. Driven by recent demand for AI, the average fee for licensing per chip continues to rise
Dolphin Investment Research on ARM and related companies
February 8, 2024 financial report review "ARM: The Wings of AI, How Long Can They Fly?"
September 13, 2023 in-depth analysis of ARM "ARM: After Selling to Alibaba, Is SoftBank's Next Lifeline Really Worth 50 Billion?"
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January 26, 2024 Intel conference call "Intel 3, Is It an Opportunity? (Intel 23Q4 Conference Call)"
January 26, 2024 Intel financial report review "Intel: No Longer the King of Processors, AI Battle Fails to Materialize"
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