Semiconductor design firm Arm Holdings plc reported strong earnings and revenue as it posted its first financial results since an initial public offering of stock in September, showing that its lucrative licensing business has doubled in size since last year.

However, its stock headed lower in after-hours trading after it offered weak guidance for its December quarter.

The company reported fiscal second-quarter earnings before certain costs such as stock compensation of 36 cents per share, easily beating the analysts’ consensus estimate of 26 cents per share. Revenue for the period rose 28% from a year ago, to $806 million, well ahead of the $744.3 million forecast. Despite the strong performance, Arm racked up a net loss of $110 million for the quarter, which it said was the result of a onetime share-based compensation payment triggered by its IPO.

It was a strong performance for the chip designer, but investors quickly became nervous after it offered a somewhat cautious forecast for the next three months. For the third quarter, Arm said it’s looking for earnings of between 21 and 28 cents per share, with revenue in a range of $720 million to $800 million. That’s a tad lighter than Wall Street’s forecast of 27 cents per share in earnings and sales of $765 million, and investors made their disappointment clear as the company’s stock fell more than 7% in extended trading.

Arm Chief Executive Rene Haas (pictured) hailed the company’s “outstanding start” as a public company, adding that it delivered record revenue thanks to the diversification of its business. “Licensing revenue was up over 100% year-over-year as the demand for AI has kicked off increased investment across all end markets,” he added.

The company creates and sells blueprints for computer chips, and its intellectual property sits at the heart of almost every smartphone in the world. Increasingly, its designs are also being used for personal computers, data center servers and other applications. The company said more than 7.1 billion Arm-based chips were shipped in the quarter.

The company makes money through royalties, which are paid when chip manufacturers pay Arm to use its blueprints to build semiconductors. The royalties Arm receives are usually a small fraction of the overall price of the chip.

However, Arm has a growing business selling more complete chip designs, saving chipmakers time and effort. Sales of these designs are recorded as licensing revenue. Through its Total Design ecosystem, customers can access pre-integrated and pre-verified chip blueprints for multiple kinds of use cases. Its customers can then refine and customize these designs to optimize them for the very specific workloads they have in mind, getting more performance out of them while reducing development costs.

During the quarter, Arm’s royalty revenue fell 5% from a year ago to $418 million, while its licensing sales rose 106% to $388 million, highlighting just how important this new business is to the company. The strength of the licensing unit suggests Arm is likely going to be able to attract yet more customers who’re interested in building custom chips based on its designs.

The lower guidance and overall loss seems to have disappointed investors, Charles King of Pund-IT Inc. told SiliconANGLE, though he noted that the company lost money only because of the compensation payment relating to its IPO. “On the plus side, that compensation figure will shrink to between $150 million and $250 million in future quarters, creating less drag on the company’s performance,” King added. “However, it’s important to note Arm’s performance since the IPO has been less than stellar.”

Holger Mueller of Constellation Research Inc. said the doubling of Arm’s licensing revenue from AI investments is an encouraging sign for the company. However, the promise of that part of the business is balanced out by concerns over the declining royalties revenue, he pointed out.

“Rene Haas and his team managed to keep the company’s loss constant compared to one year earlier, which means investors will be asking questions of its profitability if it hadn’t managed to increase licensing revenue by so much,” Mueller added. “With the revenue outlook being conservative, investors are clearly somewhat disappointed. The question now is if Arm can keep growing for the remainder of the year.”

The company said its growing licensing sales were the result of numerous long-term agreements with technology companies. Its clients are said to include fellow chipmakers such as Nvidia Corp. and Advanced Micro Devices Inc., as well as hyperscale data center firms such as Google Cloud and Meta Platforms Inc.

Arm’s IPO was was a big success, raising more than $4.8 billion in funds for the company as its share price shot up by 25% within hours of going public. Before its IPO, Arm was owned by SoftBank Group Corp., which had previously tried to sell the company to Nvidia, only for regulators to scuttle the deal in 2022.

Photo: Arm/YouTube