Arm Q2 EPS Outlook Disappoints, Shares Tumble 12%

Arm Holdings' Q2 profit forecast missed analyst expectations, with EPS projected between $0.29 and $0.37, below the expected $0.35. The revenue range of $1.01 billion to $1.11 billion aligned with Street estimates of $1.06 billion. Q1 EPS of $0.35 was down 13% YoY, while revenue of $1.05 billion was slightly above estimates. Arm CEO Rene Haas highlighted the company's performance in powering AI workloads, with royalties growing across all target end markets. Arm's US-listed shares fell 12.2% to $143.

Title: Arm Holdings Misses Q2 Profit Forecast, Stock Plunges

Arm Holdings (NASDAQ: ARM) reported its fiscal Q2 profit forecast, which missed analyst expectations. The company projected an EPS range of $0.29 to $0.37, below the expected $0.35, and revenue between $1.01 billion and $1.11 billion, aligning with Street estimates of $1.06 billion. This news sent the company's US-listed shares tumbling by 12.2%, closing at $143.

In Q1 FYE26, Arm Holdings' revenue of $1.05 billion was slightly above estimates, while the adjusted EPS of $0.35 was down 13% year-over-year. The company's CEO, Rene Haas, highlighted the company's performance in powering AI workloads, with royalties growing across all target end markets. However, the company's stock price fell due to the disappointing guidance for the second quarter.

The company's fiscal Q2 guidance for revenue was at the midpoint of the analyst consensus estimates, while the adjusted EPS guidance was slightly below expectations. The stock's decline is attributed to investors' disappointment with the second-quarter guidance for both revenue and adjusted EPS.

Investors should focus on the adjusted numbers, which exclude one-time items. The company's adjusted EPS of $0.35 was at the midpoint of its own guidance range of $0.30 to $0.38. The company's revenue of $1.05 billion was slightly above the midpoint of its own guidance range of $1 billion to $1.1 billion.

The company's key numbers for fiscal Q1 2026 were as follows:
- Revenue: $1.05 billion (12% growth)
- GAAP operating income: $114 million (37% decline)
- Adjusted operating income: $412 million (8% decline)
- GAAP net income: $130 million (42% decline)
- Adjusted net income: $374 million (11% decline)
- GAAP EPS: $0.12 (43% decline)
- Adjusted EPS: $0.35 (13% decline)

The company's adjusted operating expenses increased by 33% year-over-year, significantly more than the revenue growth. The company attributed this surge in operating expenses to an increase in engineering headcount.

Arm Holdings' royalty revenue was a record high for a first quarter, driven by the adoption of its newest architecture, Armv9, which has a higher royalty rate than its predecessor. The company's license and other revenue declined slightly due to normal fluctuations in the timing and size of multiple high-value license agreements and contributions from backlog.

The company's expansion into full-end solutions and potential entry into the ASIC market presents execution challenges. The company's operating expenses are expected to increase due to accelerated R&D investments, impacting short-term profitability.

Arm Holdings remains a stock worth watching and considering buying during pullbacks. The company has a great business model featuring recurring revenue (royalty revenue) that can have a very long tail in some cases.

References
[1] https://www.mitrade.com/insights/news/live-news/article-8-1001937-20250731
[2] https://finance.yahoo.com/news/arm-holdings-plc-arm-q1-073711816.html