- Long-awaited IPO makes disappointing start
- Stock drops 6% on poor expectation management
- Significant growth opportunities still lie ahead
Did Arm (ARM:NASDAQ) management over-egg growth prospects when doing the funding rounds for its September 2023 IPO? It looks like it after the Cambridge, UK firm’s maiden results update.
Arm delivered on improving margins but offered worryingly limp guidance, a bit of a shocker that screams an expectation management failure.
That saw the shares slump in out-of-hours trading, with pre-market quotes implying a rough 6% drop to $54.40. Arm stock listed on Nasdaq at $51 in mid-September.
WHAT ARM SAID
While beating expectations in the second quarter of its fiscal year (to 31 March 2024), guidance for the current quarter missed consensus estimates.
Revenue increased 28% year-on-year, topping $800 million for the first time, driven by ‘multiple high-value long-term license agreements signed with industry leading technology companies’, with royalty revenue benefiting from market share gains and higher royalty rates, the company statement said.
Non-GAAP (generally accepted accounting principles) operating profit increased 92% year-on-year to $381 million, resulting in a 47.3% non-GAAP operating margin.
Arm says the guidance miss was because of a large deal it anticipated signing off but will likely land later than expected. It now sees EPS (earnings per share) in the range of $0.21 to $0.28, compared to the consensus of $0.27 for the December quarter. Revenue is seen at between $720 million to $800 million.
For the full year, the company forecasts EPS in the range of $1.00 to $1.10, compared to the consensus estimate of $1.04, and revenue of $2.96 billion to $3.08 billion, compared to the consensus of $2.96 billion.
REELING BACK EXCITEMENT
‘Straight out of the IPO gates you would expect a company to beat expectations and raise guidance – that would be prudent stock management,’ said Ben Barringer, technology analyst at Quilter Cheviot.
‘Arm has failed in doing that and there are risks for the company in China, as was highlighted ahead of the IPO.’
Yet it is early days and investors should resist any temptation to judge. There was evidence of strong operational execution, which bolstered margins, and there are multiple growth opportunities ahead; AI, data centre upgrades, automotive, for example, even if consumer electricals has been weaker than hoped.
‘With Arm China also weak, the company has much to do if it is to see its share price consistently trade above the IPO price’, said Barringer. ‘For now, it is likely to bounce around that level and ultimately disappoint a few hoping for better results in the short-term.’
