Arm Q2 Earnings

By Patrick Moorhead - November 14, 2023

The Six Five team discusses Arm Q2 Earnings.

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Transcript:

Patrick Moorhead: Arm Q2 earnings. So a lot of discussion around this and Dan, I took a lot of heat. I think I did three broadcast interviews about when they went public. Again, I’m not a equities analyst, we’re industry analysts. But when somebody is looking at Arm and saying there’s no growth-

Daniel Newman: Wait, no price target, you don’t price target?

Patrick Moorhead: No price targets, nope. I would have to have a series seven.

Daniel Newman: I think you have to register.

Patrick Moorhead: Okay, I appreciate that, but I stay away from any price targets. But yeah, the meme was they’re not a growth stock, but hey, they had a beat and a beat and a little bit of a cloudy forecast where I think it impacted how the market reacted, but 28% increase in revenue driven by long-term agreements, share gains. And I am glad Arm said this, royalty price increases. I did like the augering in on AI, which they said increased their licensing 106%. I mean on the profit side, EPS was up 112%. Op inc was up up 92% and it’s the first time in the company’s history that they hit over 800 million of revenue. So net, net focus on what Arm is doing in the data center, focus on what they’re doing in automotive, focus on what they’re doing in PC.

The business model for the auto and the data center is very straightforward to me and I think we’re going to see even more announcements in the future of large companies who are creating SOCs that include Arm IP. I’m not going to pre-announce something, but it’s coming. By the way, that’s not exactly a major hanging out there on a limb, take a big risk. It’s just going to happen. And we see that as well. Customers want choices beyond, and they also want the flexibility to create their SOC. Little bit cloudy on what the PC is. On the Mac side, you’ve got an architectural license, on the Qualcomm PC side, it’s cloudy, right? The two companies are suing each other. Less clear and you literally have to guess on where that winds up. Arm wants to have a new contract. Qualcomm says, “Hey, I bought Nuvia and we have an architectural license already. I shouldn’t pay you anything extra.” But we’ll see where it happens. But I’m pretty excited for where Arm and Qualcomm based PCs are going. You and I covered it on the Six Five with Qualcomm’s Maui event.

Daniel Newman: Yeah, I think we both had the chance to sit down with Renee Hassler, CEO this week. My commentary, which is now pretty much Twitter where I like to X, or I like to leave it really-

Patrick Moorhead: I don’t know. You’re a power player in LinkedIn too, so.

Daniel Newman: Yeah, where I like to put my first musings and then copy and paste them to LinkedIn later, but anyone says X is dead, I still love it, so sue me. Join the club. Anyway. But in all serious, two things that I really took away from the conversation outside of the numbers that you so well presented, and that’s one is diversification company’s doing a good job moving and diversifying and really up the stack, right? It’s moved very prolifically from small and embedded into big designs. You can see that with Grace Hopper. You can see that with some of the stuff they’re going to be doing with homegrown silicon and hyperscale clouds. You’ve seen what they’re doing with AWS, some of this stuff they’re going to be doing for automotive. It continues to grow in its levels of sophistication.

And what this also means is new service levels, and service levels are really important for them because they’re kind of the company that’s known for like a penny a core or some tiny little revenue stream. And if Arm ever wants to get out of the hole, it’s in, people need to start to see its designs yielding more per design per core, per chip that gets manufactured with its IP. And so by becoming more sophisticated, helping with cluster design, building more comprehensive capabilities and basically short-circuiting design and engineering cycles for its partners, it’s going to be able to charge more. And you mentioned price increases. There’s a few different ways to look at it, but if Arm takes some of the strain off of the companies that are going to implement and build around Arm, they’re going to be able to charge significantly more per chip, and more per chip means more profit margin means more growth means better numbers, and that’s really what nobody in the market is fully confident.

The only thing I would say is the AI part. Renee did mention this a lot. I tend to agree, you and I both went on CNBC around the announcement of the IPO and were asked the question about AI and we both, I think we’re kind of a little skittish because it’s like, well, they don’t build GPUs, but AI is not just GPUs and I think the combination of, hey, every GPU needs a CPU core to be able to run applications, and also though a lot of AI is not going to be run on GPUs. There’s a lot of AI applications that are going to be run accelerators and accelerators is something that can be built and Arm can have a really significant role to play. Not to mention all of the demand for NPUs and other areas that are going to create next generation PCs, next generation smartphones, and of course building the servers of the future, Arm has a role to play there too.

So they are, in the worst case, they have a halo effect where the halo of AI will pull arms numbers up, but in a more realistic case, they do have a real role to play. Having said that, guide was sort of soft and weak, people didn’t love that, at least the sort of one time expenses related to the IPO are in the past. So the gap losses should subside and frankly, I think there is risk with risk and Arm has to face that challenge. I think there’s risk with X86 catching some tailwinds and both AMD and Pac Ehlinger at Intel doing better and better jobs of meeting timelines. But I also think the overall demand for silicon is going to be a tailwind for Arm either way. So good quarter, solid results. I think that’s all I’ve got to say about that. Forrest Gump, that’s all I’ve got to say about that, Pat

Patrick Moorhead: Yeah, I’m glad you brought up the different way. They make money, they have three different ways and that’s even aside from increasing royalty pricing. They have architectural licenses, they have soft IP, and then they have IP they take all the way down to the foundry and they do a bunch of software testing along with it. So I applaud Arm at pricing to value. Quite frankly, my relationship started with them, I think, God, almost 13 years ago, maybe 12 years ago. And I remember talking to Simon, which was you’re the most important company that doesn’t charge what they’re worth. And some people will debate me on that, on what Arm should be, giving away its IP for free, what happened with SoftBank and quite frankly the SoftBank acquisition gave Arm the ability to come in and create some heavy duty IP for the data center and also for automotive that investors never would’ve let them do, and look where the growth is now. So it’s such an interesting company, such an interesting story. Isn’t competition great?

Patrick Moorhead
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Patrick founded the firm based on his real-world world technology experiences with the understanding of what he wasn’t getting from analysts and consultants. Ten years later, Patrick is ranked #1 among technology industry analysts in terms of “power” (ARInsights)  in “press citations” (Apollo Research). Moorhead is a contributor at Forbes and frequently appears on CNBC. He is a broad-based analyst covering a wide variety of topics including the cloud, enterprise SaaS, collaboration, client computing, and semiconductors. He has 30 years of experience including 15 years of executive experience at high tech companies (NCR, AT&T, Compaq, now HP, and AMD) leading strategy, product management, product marketing, and corporate marketing, including three industry board appointments.