Arm Earnings: What We Learned About Growth, Competition, and Investor Expectations

November 13, 2023 / Ben Bajarin

In the latest episode of the Circuit, Ben Bajarin and Jay Goldberg discuss Arm’s latest quarter, which also happens to be their first earnings quarter as a public company. Below is a summary of topics covered on the podcast.

Chip designer Arm recently reported quarterly earnings that beat expectations and raised guidance for the full year. However, the stock dropped in after-hours trading due to confusion over quarterly guidance. This earnings report provided insight into Arm’s growth drivers, competitive threats, and how investors are still trying to model this complex business. Here are some of the key takeaways:

Growth Drivers Still Unclear

While Arm showed strong revenue growth overall, investors are seeking more clarity on the specific growth drivers going forward. Areas like Arm’s Neoverse solutions for AI workloads represent huge opportunities, but it’s uncertain whether Arm can fully capitalize yet. Adoption of Neoverse and other new products for emerging workloads will be important indicators to watch.

There also seems to be confusion around Arm’s new subscription-based business models and how licensing revenue will flow over time. The shift from upfront licensing fees to subscriptions has parallels to software-as-a-service models, but Arm’s economics are different. As analysts build detailed financial models of Arm’s various businesses, it will take a few more quarters for the street to get an accurate picture.

Arm’s Custom vs. Non Custom Customers
Arm’s competitive position in some markets appears weaker than investors expected. For example, several Arm architectural licensees like Apple and Qualcomm are designing custom Arm-based cores that outperform Arm’s off-the-shelf designs. This suggests Arm needs to keep innovating and improving its IP cores to be competitive – especially as workloads like AI evolve rapidly.

The next generation of Arm products needs to raise the bar against in-house Arm designs from architectural licensees. If not, more customers may take their business elsewhere. This competition is a major factor to watch going forward.

RISC-V Threat Overblown

While the open-source RISC-V architecture is gaining momentum in certain areas like IoT, it likely poses little threat to Arm’s core markets – at least in the next few years. Huge software and ecosystem hurdles remain for RISC-V to be viable in mobile devices and the data center. However, if RISC-V makes enough progress in lower-end applications, it could force Arm to adapt its business model to compete on cost.

Now that Arm is an independent company, it seems more willing to respond to competitive forces. The prior management team allowed RISC-V to gain ground in embedded applications without responding. Today’s Arm appears more focused on protecting its turf, which is good news for investors.

Investor Expectations Still Taking Shape
After being tied to Softbank for several years, Arm is still working to help investors understand its financials and growth potential as a standalone company. This will take time. The wide range of reactions to Arm’s latest earnings signals that analyst models and forecasts are still works in progress.

As we get more earnings reports, Arm’s commentary around growth opportunities and competitive threats should help set investor expectations around both near-term performance and Arm’s longer-term potential. While there are challenges ahead, Arm’s leadership position in powering the next generation of computing appears solid.

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