ARM rallies 25% following impressive beat and raise quarter

Arm Holdings (ARM), a leading technology company specializing in semiconductor IP, has reported impressive financial results for Q3 FYE24. The stock has ripped higher following the news. ARM is trading at $93 as investors await the conference call. 

The company achieved record revenues of $824 million, representing a 14% increase year-over-year. This strong growth was driven by both royalty revenue and licensing revenue.

Arm's royalty revenue reached $470 million, reflecting an 11% YoY increase and a 12% sequential increase. The recovery in the smartphone market and the increasing adoption of Armv9-based chips contributed to this growth. Royalty rates for Armv9 products are typically double those for Armv8 products, which has fueled the rise in royalty revenue. Arm's market share gains and higher royalty rates derived from the Armv9 transition have driven robust growth in cloud servers. 

In the automotive market, Arm-based chips for Advanced Driver Assistance Systems (ADAS) experienced significant growth, partially offset by a slowdown in the automotive microcontroller market. However, the Internet of Things (IoT)/embedded market's royalty revenue remained flat as the industry worked through inventory corrections from the previous year. The Internet of Things (IoT)/embedded market's royalty revenue remained flat as the industry worked through inventory corrections from the previous year. 

Arm's licensing revenue achieved better-than-expected results, totaling $354 million, an 18% YoY increase. This growth was attributed to strong demand for advanced Arm CPUs as companies continued to invest in artificial intelligence (AI) across various end markets. Arm's CPUs have become increasingly prevalent in AI applications, ranging from complex cloud-based systems to edge devices.

Arm's non-GAAP operating profit rose by 17% YoY to $338 million, resulting in a non-GAAP operating margin of 41.0%. This indicates the company's effective cost management and operational efficiency. 

Arm remains optimistic and expects its upcoming quarter's revenue to set another record, surpassing its previously communicated annual guidance. The company anticipates that fundamental trends, such as the increased adoption of Armv9 technology, market share gains in cloud servers and automotive sectors, and the recovery of the semiconductor market, will continue to drive revenue growth. 

The company's chips reported as shipped for the September quarter shipping period were 7.7 

ARM's non-GAAP operating profit increased 17% year-over-year to $338 million, resulting in a 41.0% non-GAAP operating margin. 

The company's remaining performance obligations (RPO) were $2,433 million, up 38% year-on-year and up slightly sequentially, driven by high-value license agreements and the renewal of a long-term customer agreement. ARM expects to recognize approximately 28% of RPO as revenue over the next 12 months, 26% over the subsequent 13-to-24-month period, and the remainder thereafter.

ARM guided for Q4 EPS in the range of $0.28-0.32, better than the $0.21 expected. Revenues are projected to come in between $850-900 million, well above the $778 Street expectations. 

The company raised its FY24 revenue outlook to $3.16-3.21 billion from $2.96-3.08 billion. It raised its adjusted EPS outlook to $1.20-1.24 from $1.00-1.10. 

The company's CEO, Rene Haas, stated, We had an outstanding Q3 delivering record revenues and exceeding the high-end of our guidance ranges for both revenue and non-GAAP EPS. Growth was driven by both royalty revenue and license revenue. Our highest-ever royalty revenue was driven by multiple factors. Firstly, we continue to benefit from higher royalty rates as the adoption of Armv9 technology increases. The royalty rates for Armv9 products are typically at least double the royalty rates for equivalent Armv8 products, and this will continue to generate royalty revenue growth as multiple end markets transition to Armv9. Haas added, Finally, the broader semiconductor market is showing signs of recovery, particularly in smartphones, which returned to strong growth in Q3.ARM's licensing revenue was supported by increasing demand for new technology driven by all things AI. From the most complex AI cloud applications to the smallest edge devices, AI on Arm is everywhere. 

Arm's dominant presence in the technology industry cannot be understated. The company's CPUs have been integral to the development of intelligent electronic devices, with more chips featuring Arm CPUs delivered in the last decade than any alternative. As the market for electronic devices powered by AI continues to expand, Arm's position as a preferred compute platform is expected to drive further growth.

In conclusion, Arm Holdings has demonstrated an exceptional performance in Q3 FYE24, surpassing revenue expectations and achieving record-high revenues. The company's strong royalty revenue and licensing revenue growth can be attributed to factors such as the adoption of Armv9 technology, market share gains,and the recovery of the semiconductor market. With a solid financial foundation and promising prospects, Arm is poised to maintain its leadership in the technology industry.

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