Arm Holdings (NASDAQ: ARM) saw its shares drop approximately 7% to $209 during after-hours trading on Wednesday, following the release of its fiscal first-quarter earnings. The stock had already closed the regular session 8.1% lower at $224.89 ahead of the report.
The decline came despite the company reporting record quarterly revenue of $1.289 billion, a 22% increase year-over-year. Adjusted earnings per share of $0.45 surpassed the consensus estimate of $0.40 by 12.5%, while revenue also exceeded the LSEG consensus by about 2%.
However, the earnings release highlighted a growing divergence between GAAP and adjusted profitability. GAAP operating margin contracted to 7.1%, down from 10.8% in the same quarter last year, while adjusted operating margin improved to 41.2% from 39.1%.
The primary driver of this divergence was a sharp increase in stock-based compensation. Equity-settled stock compensation, along with associated employer taxes, totaled $433 million, representing a 47% increase from the prior year and accounting for 33.6% of revenue, compared to 28.0% in the year-ago period.
Excluded operating expenses, which include stock-based expenses, related taxes, and other items, rose by $142 million, accounting for 60% of the revenue growth. This persistent expense growth weighed on GAAP earnings, even as adjusted metrics showed strength.
Arm's guidance for the upcoming quarter also topped expectations. The company forecast revenue of approximately $1.38 billion at the midpoint, 3% above consensus, and adjusted earnings per share of $0.47, 9% above estimates.
Revenue details showed royalty revenue rose 22% to $715 million, with data center royalties more than doubling. Licensing and other revenue grew 23% to $574 million. Annualized contract value increased 13% to $1.732 billion, though this was slower than the growth in reported license revenue, which Arm attributed to deal timing and backlog.
Chief Executive Rene Haas expressed confidence in the company's growth trajectory, noting that Arm has delivered 1.5 billion Neoverse cores in six years, with 500 million shipped in the past nine months. The company also reported over $2 billion in demand for its AGI CPU through fiscal 2028, with secured manufacturing capacity covering the first $1 billion in orders. Oracle (NYSE: ORCL) was named as a purchaser.
Operating cash flow came in at $902 million, with adjusted free cash flow of $665 million, supported by favorable timing of collections and tax payments. Despite the strong cash generation, the stock's valuation remains elevated, with a market capitalization near $240 billion and a trailing price-to-earnings ratio of approximately 266.
