Arm Slides After Smartphone Slowdown Overshadows AI Growth

(Bloomberg) — Arm Holdings Plc shares declined as much as 9% after a slowdown in the smartphone industry took a toll on the chip company’s royalty revenue, overshadowing its growth in the AI data center market.

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During a conference call to discuss fourth-quarter results, Chief Executive Officer Rene Haas said he saw unit growth for phones “flip to negative” last quarter. But the slowdown is concentrated in the lower end of the market, he said, limiting the impact on Arm.

Arm relies heavily on the smartphone industry for revenue, and that market has been shaky lately. Device makers are struggling with a lack of memory chips, hurting overall production. A push into data centers and other markets is meant to help insulate Arm from a volatile smartphone sector, but the diversification will take time.

Royalties — a closely watched measure for Arm — generated $671 million in revenue last quarter. That fell short of an average estimate of $693 million.

“We have definitely seen a slowdown” in smartphones, Haas said during an interview Thursday with Bloomberg Television. He reiterated, though, that Arm gets much of its royalty revenue from the premium segment of the market.

Expectations had been high heading into the earnings report. Arm shares more than doubled this year through Wednesday’s close, reaching $237.30. The stock fell as low as $216 in New York on Thursday.

Total revenue will be about $1.26 billion in the fiscal first quarter, which runs through June, the company said Wednesday. Analysts predicted $1.25 billion on average, according to data compiled by Bloomberg. Profit will be 40 cents a share, excluding certain items, compared with a 36-cent estimate.

The outlook reflects Arm’s efforts to generate more revenue from data centers. Cloud computing providers are stepping up investments in infrastructure to handle a flood of AI services — and that means relying more on Arm’s underlying technology for chips.

“We’re seeing the acceleration of Arm being a significant player in the data center,” Haas said.

Haas has sought to further capitalize on explosive demand for AI computing by beginning to sell homegrown chips. Until now, the company has focused on offering semiconductor designs — with Arm’s revenue coming from licensing and royalties.

A move to offer a central processing unit, or CPU, will help Arm more directly benefit from the AI data center build-out. The UK-based company said Wednesday that this new product — called the AGI CPU — would generate more than $2 billion “across 2027 and 2028.” Arm said in March that it had $1 billion of orders.

In the fiscal fourth quarter, revenue increased 20% to $1.49 billion. Profit was 60 cents a share in the period, which ran through March. Those figures both beat analysts’ estimates.

Licensing revenue, an indicator of customer interest in future use of Arm’s products, was $819 million, compared with an average estimate of $775.6 million.

The company gets paid in two ways: licenses that let customers use its designs and standards, and royalties paid per unit when the resulting chips are shipped. Actually selling chips under its own brand is a major shift for the company, which has benefited from being a neutral provider of crucial layers of technology to the whole industry.

The chipmaker, which held an initial public offering in 2023, remains majority-owned by Japan’s SoftBank Group Corp. That company appointed Haas to a wider role within the group in April. He will lead its international operations as part of founder Masayoshi Son’s push into AI chipmaking.

Haas will continue to be CEO of Arm while also running San Carlos, California-based SoftBank Group International division and help the group’s chip and AI companies work together. SoftBank owns almost 90% of Arm and has acquired other chipmakers — Ampere Computing LLC and Graphcore Ltd. — in recent years.

–With assistance from Caroline Hyde.

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