Key Takeaways

• Strong Revenue Growth and Future Confidence
• Continued Strategic Expansion into Multiple Markets
• Investment in Advanced Technologies and Ecosystem

What’s Significant

Arm Holdings plc reported a significant year-over-year revenue growth of 47%, reaching $928 million in Q4 FYE24, driven by record royalty revenue and strong growth in license revenue. The CEO Rene Haas expressed confidence in sustaining this growth trajectory, highlighting the successful adoption of Armv9, gains in the automotive and cloud sectors, and the impact of AI on licensing activity.

The company’s expansion into various markets such as infrastructure, automotive, client PCs, and smartphones, alongside the AI tailwind, has been a key factor in its unprecedented growth. The Haas’ remarks underscored the validation of Arm’s strategic directions laid out in previous years, now coming to fruition and significantly contributing to the company’s performance and outlook

Arm’s focus on developing and licensing advanced technologies, such as the Armv9 architecture and Compute Subsystems, is paying off with increased adoption across different segments. The company’s efforts to grow its ecosystem, evidenced by the increase in Arm Total Access and Flexible Access licenses, are enhancing its market position and setting the stage for long-term growth. This strategic investment in technology and partnerships is expected to drive Arm’s revenue and market share expansion in the coming year.

Positives

• Revenue Growth: Arm experienced a significant revenue growth of 47% year-over-year, with total revenue increasing from $633 million in Q4 FYE23 to $928 million in Q4 FYE24. FQ424 royalties increased 37% YoY and 9% QoQ on higher mix of Arm v9 in smartphones and gains in auto and cloud.
• Operating Margin Improvement: The non-GAAP operating margin saw a substantial improvement, going from (-0.2%) in Q4 FYE23 to 42.1% in Q4 FYE24, indicating a strong operational efficiency.
• Free Cash Flow Increase: Non-GAAP free cash flow increased by 40% year-over-year, from $454 million in Q4 FYE23 to $637 million in Q4 FYE24, demonstrating robust cash generation capabilities.
• Expansion in Access Licenses: Arm expanded its Total Access licenses to 31, up from 18 in Q4 FYE23, and its Flexible Access licenses to 222, up from 203, indicating a growing ecosystem and customer base.

Negatives

• Operating Expenses Increase: GAAP operating expenses increased by 32% year-over-year, from $656 million in Q4 FYE23 to $865 million in Q4 FYE24, reflecting higher costs associated with scaling and investment in growth.
• Diluted Earnings Per Share (EPS): While there was an improvement, the diluted EPS on a GAAP basis was only $0.21 in Q4 FYE24, which, despite being an improvement from $0.00 in Q4 FYE23, suggests there is room for growth in profitability.
• Cost of Sales Increase: The cost of sales on a GAAP basis increased by 52% year-over-year, from $27 million in Q4 FYE23 to $41 million in Q4 FYE24, indicating rising costs that could impact gross margins if not managed.
• Share-Based Compensation (SBC) Costs: The total SBC cost (equity-settled) was $186 million in Q4 FYE24, contributing significantly to operating expenses and impacting the bottom line.
• Decrease in Chips Shipped: There was a 10% decrease in chips reported as shipped, from 7.8 billion in Q4 FYE23 to 7.0 billion in Q4 FYE24, which could indicate demand fluctuations or supply chain challenges.

Main Investor Questions

• Licensing Revenue and Market Entry: Investors were interested in the sustainability of the strong licensing revenue and Arm’s position as the logical choice for partners entering markets requiring AI, rich application ecosystem support, and broad OS support.
• Recovery in China’s Handset Market: There was curiosity about the recovery observed in China’s handset market, its impact on Arm’s revenues, and how shifts in consumer buying patterns between Chinese and non-Chinese producers affected royalty revenues.
• Arm v8 to v9 Conversion Rate: Questions were raised about the conversion rate from v8 to v9 architecture, especially in the context of the infrastructure business and premium handset segment, and how this conversion impacts revenue growth projections.
• Sequential Decline in Revenue: Investors sought clarification on the drivers behind the 7% sequential decline in revenue, particularly in networking, industrial, and IoT sectors, and how these trends might affect future growth.
• Infrastructure Business and Cloud Side Growth: There was interest in the growth trajectory of Arm’s infrastructure business, specifically in the cloud segment, and whether the design wins from hyperscaler customers were in line with or exceeding initial market share growth projections made during the IPO process.

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