Arm forecasts Q3 below Wall Street on deal delay, shares dive 8%

Illustration shows Arm Ltd logo · Reuters

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By Stephen Nellis and Max A. Cherney

(Reuters) -Semiconductor company Arm Holdings on Wednesday gave a fiscal third-quarter sales outlook below Wall Street estimates, with the company attributing the forecast to a large deal that will likely land later than expected.

Arm's shares dove 8% to $50 in extended trading after the news.

But the company, which sells designs and other intellectual property for creating computing chips that power most of the world's mobile phones, also forecast fiscal full-year sales that beat Wall Street expectations, powered by a wave of companies designing new chips amid a boom in artificial intelligence applications.

Arm became publicly listed again in September after Japan's SoftBank Group, which still owns more than 90% of Arm, sold off some of its shares. One issue that the company is grappling with is new accounting rules that affect how it must recognize revenue from large, multi-year license deals.

In a shareholder letter, Arm's top executives said that "revenue recognition profiles for future agreements are subject

to change."

Analysts said that the unpredictability raises questions about Arm's valuation, which, at more than $65 billion after its initial public offering, was far higher relative to its anticipated annual revenue than any other chip company.

"There are still questions about whether there is a sustainable growth narrative for this company," said Ben Bajarin, chief executive and principal analyst at Creative Strategies. "The quarter looked good, but the guidance didn't look good - we don't really understand what the customer cycle looks like."

'STRONG DEMAND'

Arm Chief Financial Officer Jason Child told Reuters that the below-expectations guidance for the current fiscal third quarter but higher full-year forecast was because the company now expects a major licensing deal to land a quarter later than initially expected.

"These are very, very large deals that require lots of complicated approvals that go to the highest levels and it's organizations that can take a while and that's hard for us to predict," Child said in the conference call Wednesday.

Arm said it forecast a fiscal 2024 revenue range with a midpoint of $3.02 billion, above analyst expectations of $2.95 billion, according to data from LSEG. For the current fiscal third quarter, Arm expects a revenue range with a midpoint of $760 million, below analyst estimates of $767.84 million, according to LSEG data.

For Arm's second fiscal quarter ended in September, revenue jumped 28% to $806 million, ahead of an average estimate of $744.31 million, according to LSEG data. Adjusted profit of 36 cents per share beat expectations of 26 cents per share.