Arm shares slip as smartphone royalties disappoint

• Chip technology firm Arm reported revenue that missed analysts' expectations.
• Shares dipped as much as 9% in after-hours trading on the results.
• Arm's CEO said the company is considering designing its own chips.

Arm Holdings shares dipped as much as 9% in after-hours trading on the company's first-quarter earnings results Wednesday.

Here's how the company did, compared with estimates from analysts polled by LSEG:

• Earnings per share: 35 cents adjusted vs. 35 cents expected
• Revenue: $1.05 billion vs. $1.06 billion expected

The company said it expects second-quarter revenue in the range between $1.01 billion and $1.11 billion, which was in line with $1.05 billion expected by analysts tracked by LSEG.

Net income fell 42% to $130 million, or 12 cents a share, from $223 million, or 21 cents a share, a year earlier.

Arm is a chip technology firm that sells architecture for making chips that power billions of devices, including Apple and Qualcomm's chips. However, CEO Rene Haas said in a Wednesday interview with Reuters that the company was “consciously deciding to invest more heavily” in technology “beyond designs,” confirming the company is considering designing its own processors.

Executives told investors on an earnings call that the move could cause “execution risk.” Arm already sells technology to nearly every top chip designer, and Arm introducing its own completed chiplets or semiconductors could make its customers into competitors.

Arm's customers include CSPs or cloud service providers like Microsoft and Amazon that are developing custom chips based on Arm. OEMs, or original equipment manufacturers, are companies like Apple that design their own computers.

“One of the things that we're seeing with newer customers such as CSPs and OEMs and also even traditional customers, has asked for a better starting point,” Haas said on Wednesday's earnings call.

Hass said that Arm might develop entire chiplets, which could be integrated into a custom chip, or it could develop the entire chip itself.

“We're looking now at the viability of moving beyond the current platform to additional subsystems, chiplets or possibly full solutions,” Hass said.

But in the meantime, Arm's largest business, royalties for using its most basic technology in smartphone chips, underwhelmed, Arm CFO Jason Child said.

“The growth wasn't quite as strong in the smartphone sector as maybe we'd expected,” Child said.

Arm said that because it is primarily a licensing company, it expects “limited direct impact on our royalty and licensing revenues” but that the company has “less visibility into the indirect impact on end demand,” in the case that tariffs would slow sales of products with Arm technology in them.

“In licensing, customers have historically invested through near term slowdowns given lengthy chip development timelines,” Child said.

For countries that have not negotiated separate trade agreements with the U.S., Trump said he would likely impose that blanket tariff rate on their exports. But Wall Street isn't as scared as of late.

SoftBank expanded its licensing agreement with Arm, the company said on Wednesday's earnings call. SoftBank controls about 90% of Arm, and took the company public in 2023.

When asked about the expanded agreement, Child pointed to a $500 billion U.S. plan with OpenAI to build AI infrastructure called Stargate. “Stargate is looking to scale up over the next years,” Child said. “That's a lot of compute and huge potential for lots of design opportunities.”

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