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Sellers remain in control of Arm Holdings plc (ARM -15%) despite the CPU architecture provider toppling earnings and revenue estimates in Q1 (Jun). The dissatisfaction stems from ARM reiterating its FY25 (Mar) guidance even though it outperformed analyst expectations in Q1. Meanwhile, ARM's FY25 growth estimate for royalty revenue, derived from the adoption of Armv9 and Armv8 architecture, was lowered to the low-20% range from the mid-20% range. Also worth noting was ARM's decision to stop reporting the number of Arm-powered chips its customers ship, citing a shift toward higher-value, lower-volume markets, including data centers, making the figure less representative of royalty revenue growth.

What is keeping ARM from hiking its FY25 forecast? The ongoing inventory correction across the IoT and networking markets is becoming more stubborn than initially thought. While ARM expects Q2 (Sep) to mark a low point for revenue this year, this gives the company less room to realize further growth, forcing it to stay prudent in its FY25 financial targets, including adjusted EPS of $1.45-1.65 and revs of $3.8-4.1 bln. Given the buzz surrounding AI, the market was hungry for a better FY25 forecast and accompanying commentary, keeping shares trending significantly lower today.

• AI still supplied the fuel behind ARM's upbeat Q1 numbers, including adjusted EPS of $0.40 and revs of $939 mln, a 39.1% jump yr/yr. The healthy top line was supported by a record 72% leap in license revenue and a respectable 17% improvement in royalty revenue, reflecting further adoption of the v9 architecture, which comprised a quarter of overall royalty revenue, up 5 pts from last quarter.
  • Royalty revs from smartphones surged by over 50% yr/yr even though smartphones sold inched by only a mid-single-digit percentage higher, underpinning the potential for royalty revenue to accelerate once economic conditions become more favorable.
• CEO Rene Haas commented that AI is everywhere now, sustaining demand for ARM's power-efficient platform. Given the power requirements of AI, efficiency may prove to be the x-factor over the long haul, driving demand away from more traditional x86 architecture, which is primarily used by Intel (INTC) and Advanced Micro (AMD). ARM's technological advantage was already showcased in Q1, announcing continued market share capture in automotive and cloud service providers.
  • With Microsoft (MSFT), whose Copilot AI could entice further PC upgrades, recently touting huge improvements with Windows on Arm, ARM could enjoy another major revenue stream as consumer spending on PCs returns more substantially.
• Market share gains were partially offset by persistent weakness in IoT and networking equipment. Several of ARM's semiconductor peers warned of slowdowns across these markets. Still, investors were surprised by how influential this trend would have on ARM's outlook.

AI continues to drive considerable growth for ARM. The company boasts several technological advantages that can capitalize on a long-term AI-induced tailwind. However, in the interim, a more persistent-than-expected inventory correction cost ARM an arm and a leg today.