Ambiguous Earnings Report for Arm, Slumps 8% Post-Market

Arm's AI data center business is robust and has provided earnings guidance slightly above expectations.

On May 6th, after the US stock market closed, Arm announced the financial results for the fourth quarter of fiscal year 2026, with revenue increasing by 20.2% year-on-year to $1.49 billion, and adjusted earnings per share at $0.60, both exceeding analysts' expectations.

Arm expects first-quarter revenue of about $1.29 billion, with adjusted earnings per share ranging from $0.36 to $0.44, both higher than analysts' previous forecasts.

Management pointed out that the demand for high-efficiency CPU design in AI data centers is continuously heating up, effectively hedging the short-term pressure in the smartphone market. The company also disclosed that its AGI CPU product has received customer demand exceeding $2 billion for the fiscal years 2027 to 2028.

Following the announcement, Arm's share price rose by about 13.62% in after-hours trading, and then fell by 8.17% after the market closed.

Licensing revenue below expectations, smartphone market under pressure

Behind the better-than-expected revenue for this quarter, Arm's two main sources of income showed a clear divergence.

Licensing and other revenues increased by 29% year-on-year to $819 million, while royalty income grew at a relatively moderate pace, rising by 11% year-on-year to $671 million, slightly below market expectations.

Analysts believe that despite fluctuations in the shipment of terminal devices, customers are actively prepaying licensing fees to lock in the right to use Arm's chip designs in advance.

The correlation between licensing revenue and recent product sales is relatively low, which can provide some cushion for the company's overall performance when the consumer electronics market weakens.

In terms of profitability, the adjusted gross profit reached $1.57 billion, with an adjusted gross margin of 98.3%, higher than the market预期 of 98.1%; adjusted operating profit was $731 million, with an adjusted operating margin of 49.1%.

Arm management clearly indicated the headwinds faced by the smartphone market in the financial report.

Tight supply of memory components may drive up the prices of terminal devices, thereby affecting the shipment of mobile phones and royalty income tied to shipments. Mobile chip supplier Qualcomm has also conveyed a similar signal in its own performance outlook.

As Arm's architecture covers almost all smartphones globally, the prosperity of the mobile phone market still has a significant impact on its royalty income. In the short term, supply chain pressures may limit this part of the revenue.

AI Data Centers Become a New Growth Engine, Demand for AGI CPUs is Substantial

AI data center business is becoming an important pillar of Arm's growth logic.

Management stated that more and more Arm-based designs are entering AI data center deployments, and power consumption control and thermal management have become increasingly prominent constraints in this scenario, highlighting Arm's competitive advantage in high-efficiency CPU design.

The Arm AGI CPU released in March of this year has received high attention from customers.

The company disclosed that the total customer demand for the product in the fiscal years 2027 to 2028 has exceeded $2 billion. However, Arm also noted that the AGI CPU is currently facing supply constraints, which to some extent limit the actual shipment scale in the short term.

From a broader perspective, the computational demand of the AI wave is extending from specialized accelerated chips like GPUs to general-purpose CPUs.

The dependence of new-generation AI systems on task scheduling, memory access, and network collaboration is increasing, which opens up new application spaces for Arm's CPU architecture in the future data center market.