Arm Holding Q3 2024 $ARM (+2.84%)

Financial performance:

• Revenue: Total revenue for the second quarter of FY2025 was $844 million, an increase of 5% year-over-year. The increase in revenue was driven by record levels of license fees and continued strength in the licensing business.
• Net Income: GAAP net income was $107 million, compared to a loss of $110 million in the same period last year. Non-GAAP net income was $317 million, but a decrease from $378 million in the prior year.

Balance Sheet Overview:

• Assets: Total assets were $8,086 million as of September 30, 2024, including $1,498 million in cash and cash equivalents.
• Liabilities: Total liabilities decreased to $2.074 million compared to $2.632 million at March 31, 2024.
• Shareholders' equity: Shareholders' equity was $6.012 million.

Income structure:

• Gross profit: GAAP gross profit was $812 million, while non-GAAP gross profit was $820 million, representing an exceptionally high non-GAAP gross margin of 97%.
• Operating Income: GAAP operating income totaled $64 million, and non-GAAP operating income totaled $326 million.

Cash Flow Overview:

• Operating Activities: Net cash provided by operating activities was $6 million.
• Free Cash Flow: Non-GAAP free cash flow for the quarter was $(65) million.

Key Metrics and Profitability Metrics:

• Operating Margin: GAAP operating margin was 8%, while non-GAAP operating margin was 39%.
• Gross margin: Non-GAAP gross margin reached a remarkable 97%.

Segment information:

• Royalties: License fees increased 23% year-over-year to $514 million, supported by the launch of Armv9 and a recovery in the smartphone market.
• License revenue: License revenue decreased 15% year over year to $330 million.

Competitive position:

• Arm is benefiting from strong growth in its license fee business, with Armv9 playing a significant role in this increase. The company has expanded its Arm Total Access and Arm Flexible Access programs, demonstrating high customer retention.

Forecasts and management comments:

• Q3 FYE25 revenue guidance: Revenue is expected to be between $920 million and $970 million.
• Non-GAAP operating expenses: Expected to be approximately $500 million.

Risks and Opportunities:

• Opportunities: Continued growth in royalties and expansion of access programs.
• Risks: Fluctuations in license revenue due to variation in timing and size of agreements.

Summary of results:

Positives:

Strong growth in license fees: Increase of 23% compared to the previous year.

High non-GAAP gross margin: At 97%, the company is showing impressive profitability.

Increase in annual contract value: Increase of 13%.

Expansion of access programs: Arm Total Access and Flexible Access show expanded customer loyalty.

Improved GAAP net income: Positive development compared to the previous year.

Negative aspects:

Decline in license revenue: A 15% decrease year-over-year.

Decline in non-GAAP net income: Lower than in the previous year.

Negative free cash flow: Free cash flow was negative in the quarter.

Increased non-GAAP operating expenses: Increased engineering costs due to higher headcount.

Decrease in cash and cash equivalents: Reduction compared to March 31, 2024.