Arm Holdings Beats Earnings But Stock Falls 8% on Q4 Guidance

Arm Holdings reported better-than-expected Q3 results with revenue up 26% year-over-year, driven by surging AI demand. Despite the beat and CEO optimism about accelerating AI computing, shares dropped over 8% in after-hours trading as investors digested mixed Q4 guidance.

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Arm Holdings Plc (ARM) delivered a solid quarter on Wednesday, but Wall Street wasn't entirely impressed. The chip designer beat analyst expectations on both the top and bottom lines, yet shares tumbled more than 8% in after-hours trading as investors parsed through the forward guidance.

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Arm reported fiscal third-quarter revenue of $1.24 billion, topping analyst estimates of $1.22 billion. Adjusted earnings came in at 43 cents per share, ahead of the 41 cents analysts were expecting, according to Benzinga Pro.

The year-over-year comparison looks even better. Total revenue climbed 26%, with royalty revenue surging 27% to $737 million. That growth came from exactly where you'd want it—AI and general purpose data centers, smartphones, and both physical AI and edge AI applications. Licensing revenue wasn't slouching either, growing 25% year-over-year to $505 million.

"Demand for the Arm platform is strong as more leading companies signed high-value licenses for next generation technologies," the company told shareholders.

Annualized contract value jumped 28% year-over-year to $1.62 billion. The company generated $365 million in operating cash flow and $169 million in adjusted free cash flow during the quarter, ending the period with $3.54 billion in cash, cash equivalents and short-term investments.

"Arm delivered a record revenue quarter as demand for AI computing on our platform continues to accelerate," said Rene Haas, CEO of Arm Holdings. "The fundamentals of the Arm business have never been stronger."

The culprit appears to be forward guidance that didn't quite wow investors. Arm expects fourth-quarter revenue between $1.42 billion and $1.52 billion versus estimates of $1.44 billion. The company's adjusted earnings guidance of 54 cents to 62 cents per share straddles the analyst estimate of 57 cents per share.

In other words, the guidance ranges include the Street's numbers, but they also include scenarios where Arm comes in below expectations. After a strong rally in the stock, investors seem to be demanding more certainty.

ARM shares were trading at $96.47 in after-hours action, down 8.04% from the regular session close.

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