The Six Five team discusses Arm Q1FY25 earnings.
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Transcript:
Patrick Moorhead: Moving into Arm, I had a beat and a beat. It was a good conversation with Renee Haas, but the guide obviously fell short even though Arm raised its guide $250 million.
Stacy Rasgon: Yeah, well they helped the full year. That’s the issue. So they’ve got to beat and beat the quarter, but they help the full year so you’re kind of implicitly taking the back half down if you do that. The other is you got to remember Arm trades at like a thousand times priced a quarter or whatever the number is, right?
Patrick Moorhead: Expectations, expectations based on the valuation are super high.
Stacy Rasgon: Yeah, that one’s always-
Patrick Moorhead: So it’s interesting, I think the licensing at 72% is eye-popping. But I got to tell you, I’m actually more impressed with the 17% royalty increases ’cause it’s so much more sticky. They have a product called CSS, which essentially, where ARM is doing more than giving you some soft macros that you can license, right? They’re doing software validation, they’re taking their IP all the way to the foundry. And they have about 50 different services they put in there. It’s higher revenue, higher margin dollars. Companies like AWS, Google, Microsoft with Data Center. So that to me is super impressive.
V9, right? You’re seeing, I think they went from 20% of licensing to 25%. Big boost, and by the way, higher margin. I think on the smartphone side, the licenses are double. I think I heard that correctly, which is good. They have about 75% less, sorry, 75% left to go, meaning there’s still room there. Long-term, it’ll probably be less 50/50 royalty and license, probably be 60% royalty, 40% licensing and an ongoing concern. That doesn’t mean licensing will go down, it just means the company thinks that royalty will go up. Unclear the financial impact of these new Arm-based Windows PCs. We know the challenge or the lawsuits going between Qualcomm and Arm right now.
Stacy Rasgon: They didn’t talk about that at all, I’m assuming. Did they?
Patrick Moorhead: I don’t know. They didn’t, I don’t even know how we would model something like that ’cause they are, sorry, they are getting licensing out of that based on the Nuvia-
Stacy Rasgon: Yeah, the only thing I find hilarious there is, I mean, for Arm in general, it’s important for them to be able to tell a story that is not smartphone-based over time. And Qualcomm is one of the biggest proponents of using Arm in things that are not smartphones and yet they’re suing them. So I don’t know.
Patrick Moorhead: Yeah. And customers just want this whole thing to go away. My final comment on this, what’s so interesting, Arm, in terms of durability, it’s not like you’re going to pull out, like if you’re a licensee, it’s not like you’re going to completely pull out and go to risk five.
Stacy Rasgon: Yeah, the ecosystem isn’t there. I mean, risk five is gaining traction in some-
Patrick Moorhead: Especially at the lower end, lower end embedded where there’s not a high level operating system. Yes, absolutely. But yeah, it’s durable.
Stacy Rasgon: Not there, right?
Patrick Moorhead: Yeah. Net-net, huge valuation people are looking for and they’ve kind of been bundled it with this AI stocks. Like they’re bundled in with the Nvidias, the AMDs, the Broadcoms, folks like that. So the expectations are pretty high.
Stacy Rasgon: Yeah.
Daniel Newman: I mean, look, by the way, you all watching the market at all?
Patrick Moorhead: Yes.
Daniel Newman: Jesus, wow. I didn’t actually look for a while and now I ran out of the screen to go vomit real quickly and then I just quickly reminded myself that it’s all paper anyway until you sell it. But yeah, it’s brutal out there. Arm did fine. I mean you guys hit it on a lot of it. I thought it was fine. I mean, you beat and nowadays, if you don’t do the trifecta, you’re not going to get the, you’re just not going to get the pop. And they didn’t do the trifecta, like you said, they did raise last quarter. But people right now, this AI play, it’s not about lean, mean operating beats, it’s about crushing. And if you’re not crushing, everybody’s just kind of like, eh, it’s it. But by the way, that’s fundamentally baked into the fact that everybody out there that has half a brain knows the economy actually sucks.
I’m just saying the economy actually sucks. I’ve been saying this for a while and it’s not like my moment of victory, but I’ve been looking at these adjustments that have been made on jobs reports. I’ve been looking at the actual inflation in the, I’m like, there’s no way this is such, and I know we’ve got to kind of dance the dance, but it’s just not that good out there. So AI carries the day and that’s what it is. And so if your number isn’t huge, if you don’t have a great AI story, if you’re not showing massive growth, and if you’re not guiding up, you’re going to just kind of get that blase result. And Stacy, I think you said it well, I don’t think it’s a thousand, but I think across the, I know I’m joking, but across the semi-space, I mean Arm trades at just this remarkably high premium.
And so that also leaves less latitude for anything less than amazing because people, so I think in the end though, they’re executing, they’re expanding. They’ve got these data center homegrown chips that they’re building on, they’re going to expand their footprint into AI. And even if they don’t expand it meaningfully, as AI expands, you can’t do it without CPUs. So they’ve got a benefit there, and no matter which handset kind of ends up being the winner in the AI handsets, Apple or anyone else, there’s Arm content. So there’s just a lot of nice tailwinds and they’re raising prices and they’ve been able to do that somewhat effectively. So all those things together, it’s been a good shot ****. Sorry.
Stacy Rasgon: Turn it off.
Patrick Moorhead: All right, we just got the explicit rating on YouTube.
Daniel Newman: Oh man, I’m sorry. I hope that the people that listen to our show are grown up enough that they can hear an F bomb when the market’s down 800 points in the morning. So off we roll.
Patrick Moorhead: Yeah, I mean it’s crazy. You see T-Mobile, Apple and AMD are actually up. Everybody else is getting slaughtered. Intel’s down 27%. I called 25% yesterday.
Daniel Newman: That’s good. I’ve got a message.
Patrick Moorhead: That’s where they were going to end up. And again, I’m not the equities guy, but it felt like there would be just a total meltdown and we have a meltdown.
Author Information
Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
