Arm's strong quarter overshadowed by weak guidance and rising costs

Arm Holdings posted strong fiscal fourth-quarter results, but its cautious first-quarter guidance—calling for lower-than-expected revenue and earnings—disappointed investors. Weaker licensing activity, mounting expenses, and uncertainty in smartphone and broader markets have cast doubt on near-term growth despite continued momentum in AI server and data center deployments.

Arm Holdings reported a robust fiscal fourth quarter, with revenue rising 34% year-over-year to US$1.24 billion, driven by strong royalty contributions. The chip design firm posted a net income of US$584 million and an operating income of US$655 million, with gross margin reaching an impressive 98.4%. License and other revenue came in at US$634 million, while royalty revenue closely followed at US$607 million. The company's annualized contract value, a key measure of future sales, reached US$1.37 billion.

In prepared remarks, Arm noted that the fourth quarter marked a strong finish to an outstanding year, with record revenue surpassing US$1 billion for the first time. For the full fiscal year 2025, Arm's revenue exceeded US$4 billion, with royalty revenue breaking US$2 billion. During the quarter, Nvidia began full production of its Armv9-based Grace Blackwell superchip and saw growing adoption of its AI desktop, DGX Spark, powered by this chip. Meanwhile, Google and Microsoft announced rapid expansions of their Arm-based data center chips.

Despite the solid finish to the fiscal year, Arm's outlook for the fiscal first quarter appeared conservative. The company guided revenue between US$1 billion and US$1.1 billion, with earnings per share projected at 30 to 38 cents. Operating expenses are expected to hover around US$625 million as the firm ramps up investments in engineering capacity.

Analysts acknowledged Arm's recent strong performance but raised concerns about the near-term outlook. Bloomberg Intelligence noted that while fourth-quarter revenue exceeded expectations due to stronger royalties, softer licensing activity and potential weakness in the smartphone and broader markets could weigh on upcoming quarters. "This will likely dampen the upside from AI servers," it added.

According to Bloomberg, Morgan Stanley echoed similar sentiments, highlighting the bottom-line beat from resilient royalties but cautioning that weaker-than-expected licensing activity and rising expenses suggest margin pressure ahead. "We think Arm is building its engineering base quickly, given the demand to come," the firm said, maintaining a positive long-term view on Arm's prospects given its broad market drivers.

Evercore ISI noted that while the quarterly results were stronger than expected, Arm's forward guidance fell short of consensus on key metrics, signaling a cautious stance as macroeconomic uncertainties persist.

Source: Arm, May 2025

Source: Arm, May 2025

Source: Arm, May 2025

Article edited by Jerry Chen