Arm Holdings (NASDAQ:ARM) saw its shares climb 7.1% to $240.96 during early Nasdaq trading on Thursday, following the company's announcement of a remarkable fourfold increase in the pace of shipments for its AI cores. The surge came after the company reported its fiscal first-quarter results, which included adjusted earnings of $0.45 per share and total revenue of $1.289 billion.
The standout metric for investors was the acceleration in server shipments, which overshadowed a modest earnings beat. Arm delivered its most recent 500 million Neoverse cores in just nine months, compared to the six years it took to reach the first billion. This implies an annualized shipment rate of approximately 667 million cores, up from 167 million previously, representing a quadrupling of pace.
Revenue for the quarter ended June 30 rose 22% year-over-year to $1.289 billion, surpassing the consensus estimate of $1.260 billion. Adjusted earnings per share of $0.45 also beat expectations of $0.40. However, the quality of earnings showed some mixed signals. The adjusted operating margin improved by 2.1 percentage points to 41.2%, while the standard accounting margin declined by 3.7 points to 7.1%, partly due to a 29% increase in research expenditure to $838 million.
Royalty income from data centers more than doubled during the quarter, signaling a strategic shift in Arm's revenue reliance away from smartphones. This diversification is crucial as smartphone demand remains a near-term vulnerability. Chief Executive Rene Haas highlighted that as AI inference workloads increase, central processors are taking on additional tasks, creating more demand for Arm's CPU technology.
Arm's introduction of its AGI CPU in March marks a significant transition from design licensing to producing complete chips. Orders for this new processor have already surpassed $2 billion for fiscal years 2027 and 2028, with early shipments delivered to multiple clients. Oracle Corporation (NYSE:ORCL) has committed to purchasing the new processor, according to Haas. Analysts at Jefferies Financial Group (NYSE:JEF) project fiscal 2031 sales of $18 billion, while Arm's own forecast stands at $15 billion.
Despite the positive momentum, Arm's second-quarter guidance only modestly exceeded consensus. The revenue midpoint of $1.38 billion was 3.0% above the average analyst forecast, while the adjusted EPS midpoint of $0.47 was 9.3% higher. The company cautioned about a sequential dip in handset royalties for the coming quarter, citing memory shortages as a contributing factor, which led to an after-hours selloff on Wednesday.
Cash generation remained robust, with adjusted free cash flow surging to $665 million from $150 million a year earlier, supported by favorable receivable collections and tax payment timing. However, valuation risks persist. Based on a market capitalization of $252.5 billion, Arm trades at nearly 49 times annualized sales from the first quarter, a metric that does not account for seasonality and should not be considered a forward-looking indicator.
Thursday's recovery underscores investor focus on Arm's progress in server acceleration, with the fourfold increase in shipments overshadowing only moderate forecast beats and weaker handset demand. Maintaining this momentum is now critical for the company's growth trajectory.
