By Juby Babu, Max A. Cherney and Stephen Nellis
Feb 4 (Reuters) – Shares of Arm Holdings fell on Wednesday as its licensing revenues fell short of Wall Street estimates, despite a push by the company to boost the segment with new chip technology designs.
Arm shares were down about 8% in after-hours trading.
The company’s miss on licensing revenues and results on Wednesday from chip supplier Qualcomm – which expects a global memory supply shortage to hit mobile phone sales – pressured the stock, analysts said.
“The miss in licensing revenue (led) to the fall in shares, and smartphones will have to deal with high cost of memory which will be a headwind for Arm,” said Kinngai Chan, senior research analyst at Summit Insights. “A weak licensing revenue today will likely result in weaker future royalties revenue.”
Arm makes money by selling companies such as Nvidia and Apple licenses to use its technology and then charges a royalty fee for each product that uses a design. Its chip designs are prized for their power efficiency, a critical advantage for data center operators looking to manage their soaring energy costs and heat generated by running massive AI models.
For Arm’s fiscal third quarter, licensing revenue, which includes upfront fees for access to its technology, stood at $505 million, slightly below estimates of $519.9 million, according to FactSet. That came even as Arm pushes customers to adopt the latest version of its chip technology, which comes with higher licensing costs.
The company expects royalties to be up “low teens” year-on-year in the fourth quarter, and licensing to be up “high teens” compared to the prior year.
Arm issued an upbeat fourth-quarter revenue forecast of $1.47 billion, above an estimate of $1.44 billion, according to data compiled by LSEG, driven by strong demand for its energy-efficient chip designs used in AI applications across data centers and smartphones.
STRONG DEMAND FOR ARM’S CHIP DESIGNS
Major technology companies, including Nvidia with its Grace central processing unit, have embraced Arm’s architecture for AI-focused server chips, validating its role in the AI ecosystem.
AI agents, which are pieces of software that can complete some tasks online and on PCs, will continue to benefit Arm’s sales for the foreseeable future, CEO Rene Haas said. Demand for Arm’s designs that are useful for AI is so strong that Haas described it as “beyond no end in sight.”
Chips based on Arm’s designs, AI companies have found, are needed to manage the vast amounts of data flowing between Nvidia graphics processing units and other AI processors.
The company reported total revenue of $1.24 billion, up 26%, for the third quarter, beating an estimate of $1.22 billion.
It posted adjusted profit of 43 cents per share for the quarter, slightly ahead of expectations of a profit of 41 cents. It had reported a profit of 39 cents last year.
Revenue from royalties, which Arm collects on each chip shipped using its technology, rose 27% to $737 million in the third quarter, above estimates of $707.9 million, according to FactSet data.
Last year Arm discussed building its own chip, including recruiting staff to help with its design. Its efforts to build its own complete chip have weighed on the company’s operating expenses.
Arm said it planned to hold an event on March 24 at 10:00 a.m. Pacific Time (1800 GMT). Executives declined to provide details on what the event was for.
(Reporting by Juby Babu in Mexico City and Max Cherney and Stephen Nellis in San Francisco, editing by Deepa Babington)
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