Arm Shares Slide 8% as In‑Line Results and Rising Costs Temper AI‑Fueled Growth Story

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Arm Holdings’ latest earnings report offered plenty of positives — record royalty revenue, solid growth across key end markets, and raised full‑year guidance. Yet despite the headline beat, shares fell as much as 8% in after‑hours trading. The sell‑off reflected investor concerns that the results, while strong, didn’t meaningfully exceed elevated expectations after a sharp rally this year, and that rising expenses and slower‑than‑hoped adoption of newer technologies such as Armv9 could temper near‑term profitability. The stock’s reaction underscores how much Arm has already been priced as an AI winner, leaving little room for anything less than a blowout.

For the June quarter (Q1 FYE26), Arm posted revenue of $1.05 billion, essentially in line with analyst expectations of $1.06 billion, while adjusted EPS came in at $0.35, exactly matching consensus. Royalty revenue, the company’s biggest profit driver, rose 25% year‑over‑year to $585 million, benefiting from increased adoption of Armv9 architecture and the ramp‑up of chips based on Arm’s Compute Subsystem (CSS). Licensing and other revenue slipped 1% year‑over‑year to $468 million due to normal fluctuations in deal timing. Annualized contract value grew a healthy 28% year‑over‑year to $1.53 billion, underscoring steady demand for Arm’s designs. Still, with shares already up more than 30% year‑to‑date, the “in‑line” nature of the results proved underwhelming for investors seeking upside surprise.

Breaking down segment performance, royalties carried the quarter. Smartphones and data center deployments — particularly AWS Graviton, Microsoft’s Cobalt, Google’s Axion, and Nvidia’s Grace — helped drive the record $585 million royalty tally. In licensing, MediaTek’s Dimensity 9400 SoC and flagship smartphones from Oppo and Vivo supported demand, though CFO Jason Child acknowledged a modest miss relative to hopes in the smartphone sector. IoT contributions remained solid, while early shipments of CSS‑based chips gave royalties a meaningful boost. Automotive, a smaller contributor compared to handsets and cloud, showed steady gains but remains a long‑term growth pillar rather than a near‑term profit driver.

Compared to Wall Street forecasts, the quarter was a technical beat — revenue a touch ahead of FactSet’s $1.05 billion consensus and EPS exactly in line at $0.35. But management’s forward guidance, while strong, essentially reaffirmed expectations rather than setting a new bar. For Q2, Arm guided revenue of $1.01–$1.11 billion (midpoint $1.06 billion, in line with consensus) and EPS of $0.29–$0.37 (midpoint $0.33, slightly below Q1’s $0.35). Operating expenses are projected to rise to ~$655 million from Q1’s $619 million as Arm continues to ramp R&D. On a full‑year basis, management raised its revenue guidance midpoint to ~$4 billion, representing 24% year‑over‑year growth, with royalty growth expected in the high teens and licensing up ~30%.

CEO Rene Haas emphasized that AI demand remains the key growth driver, pointing to Arm’s positioning as the CPU of choice for AI workloads across the cloud and edge. He cited AWS’s disclosure that more than 50% of its CPU capacity installed over the past two years uses Arm‑based Graviton chips. Haas also noted progress in AI PCs, with Snapdragon X Series platforms gaining traction and more than 100 designs expected through 2026. At the same time, he confirmed that Arm is evaluating moving beyond IP licensing into designing its own chiplets or even complete chips, a shift that could open new revenue streams but also risks antagonizing current customers.

The Q&A session highlighted both optimism and unease. Analysts asked about the pace of CSS and Armv9 adoption. CFO Child acknowledged that Armv9’s contribution to royalties had plateaued this quarter, though he stressed adoption remains on track to reach 60–70% of total royalties over time. Analysts also questioned the timing of licensing revenue recognition, given the wide range of outcomes tied to large deals. Management responded by pointing to healthy annualized contract values and strong customer engagement, but kept the Q4 guidance range deliberately wide due to deal‑timing uncertainties.

Investors also keyed in on risks. Rising operating expenses — forecast to climb further in Q2 — will pressure margins in the near term, even as revenue grows. The potential for Arm to begin designing its own chips raised questions about execution risk and possible channel conflict with existing licensees, who are also customers. Macro conditions, including U.S. tariff policy and slowing Android demand in China, add further uncertainty. Management downplayed direct tariff exposure but admitted visibility into indirect impacts on end demand remains limited.

Despite these concerns, sentiment remains broadly constructive. Analysts noted Arm’s strong strategic positioning in AI, data center, and IoT markets. The company’s raised full‑year guidance and record royalty performance reinforce its role as a central player in the next wave of semiconductor innovation. However, the post‑earnings sell‑off reflects the high bar Arm faces: merely meeting expectations isn’t enough when the stock has already doubled since its 2023 IPO.

Looking ahead, investors will be watching closely for:

• The pace of Armv9 and CSS adoption in royalties, especially across smartphones and servers.
• Execution on large licensing deals, which drive lumpy but high‑margin revenue.
• Progress in data center deployments with AWS, Microsoft, Google, and Nvidia.
• Expense management, with R&D spending projected higher in coming quarters.
• Clarity around Arm’s potential move into chip design, and its implications for customer relationships. Bottom line: Arm delivered a record quarter and raised its full‑year guide, but the stock’s sharp sell‑off reflects investors’ demand for more than “in‑line.” With AI workloads driving growth and hyperscaler partnerships deepening, Arm remains well positioned — but it must execute on technology adoption and manage rising costs to justify its premium valuation.