What to expect from ARM Holdings earnings?

ARM Holdings (ARM.US) is scheduled to announce its fiscal-Q4 2024 results today after close of the Wall Street session. Report will be closely watched not only because ARM is an AI-related company, but also because its latest quarterly report triggered a massive, almost-50% share price jump on the next day.

ARM Holdings is expected to report a strong sales growth for the January - March 2024 quarter, with over 30% growth in both license and royalty revenue. Adjusted gross profit growth is expected to outpaced total revenue growth, hinting at improved efficiency. Company is expected to report positive adjusted operating and net profits, with margin improving. On the other hand, a big drop in free cash flow is expected.

Fiscal-Q4 2024 expectations

• Revenue: $875.6 million (+38.9% YoY)
  • License and other: $375.8 million (+45.1% YoY)
  • Royalty: $504.2 million (+34.8% YoY)
• Annualized contract value: $1.18 billion 
• Adjusted gross profit: $868.4 million (+39.7% YoY)
  • Adjusted gross margin: 96.4% (95.7% a year ago)
• Adjusted operating expenses: $490.1 million (-9.6% YoY)
• Adjusted operating income: $355.9 million (-$50 million a year ago)
  • Adjusted operating margin: 40.5%
• Adjusted net income: $320.6 million (+1681% YoY)
  • Adjusted net margin: 36.6%
• Adjusted EPS: $0.29 (-$0.03 a year ago)
• Adjusted free cash flow: $266.3 million (-68.4% YoY)

While fiscal-Q4 2024 results will be watched closely, markets may pay a bigger attention to guidance offered by the company. After all, it was guidance that determined post-earnings market reaction in case of many companies during this season, like for example Tesla or Meta Platforms. Analysts are expecting revenue growth in fiscal-Q1 2025 (calendar April - June 2024) to moderate from fiscal-Q4. Nevertheless, profits and margins are expected to improve in fiscal-Q1 2025 compared to fiscal-Q4 2024.

Fiscal-Q1 2025 expectations

• Revenue: $868 million (+28.6% YoY)
• Adjusted gross profit: $815 million (+26.6% YoY)
• Adjusted operating expenses: $477.5 million (+28.4% YoY)
• Adjusted operating income: $348 million (+27.8% YoY)
• Adjusted EPS: $0.31 ($0.24 a year ago)

Full-year fiscal-2025 expectations

• Revenue: $4 billion 
• Adjusted operating expenses: $2.01 billion
• Adjusted EPS: $1.53

Option markets are implying an around-11% post-earnings move in ARM Holdings share price. Traders should, however, keep in mind that bar of expectations for the company is set high. ARM stock more than doubled in value since its IPO in September 2023 and is trading at the highest forward P/S multiple among AI hardware companies. In fact, ARM has the highest forward P/S multiple out of all Nasdaq-100 stocks, including Nvidia. Such a stretched valuation suggests that a failure to deliver onto markets' expectations, may lead to a sharp repricing. Another important factor to consider is that SoftBank continues to hold an around 90% stake in the company. A small free float increase the risk of volatile moves on company's stock.

ARM Holdings (ARM.US) jumped around 25% off the low reached on April 19. However, stock continues to trade almost 35% below all-time highs reached in the first half of February. Source: xStation5