Yesterday Arm reported a solid set of results. Despite this the stock fell over 10% after hours reflecting a disconnect between expectations and what is actually a fairly strong business. By the numbers, Q1 revenues came it at $939 million with EPS of $0.40, both ahead of consensus of $902 million and $0.34, respectively. They then guided Q2 revenue to $780 million to $830 million, comfortably ahead of consensus of $804, and EPS of $0.23-$0.27, versus an expected $0.27. That last EPS figure was a bit disappointing as the Street will read their guidance at the midpoint, so $0.25. Given current market volatility and the multiple at which Arm currently trades, that small miss is enough to merit a bit of a downturn in the stock. But likely far more concerning was the company’s full year guidance which they held steady at. $3.8 billion to $4.1 billion and $1.45 to $1.65. The problem with that full year guidance is mathematical. If Q1 and Q2 are both above expectations, but the full year is unchanged, then Q3 and Q4 are going to be less than we expect.
So the company seems to be indicating that their string of raising estimates is over, which is bad news for investors buying a stock trading at ~90x next year’s EPS. On the other hand, the company is on track to do $4 billion in revenue this year, which is over 20% above the prior year, with EPS almost tripling in the same period. This is a company that is on track to double revenue in four years and it is demonstrating considerable operating leverage and thus even greater growth in profitability.
In our view the company continues to struggle with the fact that no one really understands their business. Over the past three quarters, by our count almost half the questions on their earnings call are some version of analysts trying to figure out how to model Arm’s revenue. We mean no insult to those analysts, the problem is that Arm’s business is just hard to model. For starers, they are constrained from providing much insight into their customer base. Arm contracts are deeply confidential. And a bigger problem is that the company has a highly diversified set of products, which are undergoing a fairly significant change. For instance, the company’s Compute Sub-System (CSS) products are important, but modeling CSS revenue is challenging to put it mildly. The same goes for Arm Flexible Access (AFA) and Arm Total Access (ATA) lines. And just for fun, the company introduced some new acronyms this quarter – Remaining Performance Obligation (RPO) which is a bridge between its backlog and revenue. To their credit the company is trying, they provide more information about their business than most companies, it’s just hard to explain.
Beyond Arm’s progress, a few other things on the call stood out for this quarter. Notably smartphone revenue was up significantly reflecting the cyclical upturn in the market. On the other hand, the company noted a slowdown in industrial and IoT end markets, a segment which has emerged as a big puzzle this quarter for many companies.
Leave a Reply