Shares of Arm Holdings Plc surged in after-hours trading, gaining more than 40% at one point as the company beat Wall Street’s estimates and offered a robust outlook for the current quarter in its first earnings report since going public again.

The company reported net income for the third quarter of $87 million, down from a $152 million profit one year earlier. Earnings before certain costs such as stock compensation came to 29 cents per share, beating Wall Street’s call for earnings of 25 cents per share. Revenue for the quarter rose 14% from a year earlier, to $824 million, well ahead of the consensus estimate of $761 million.

Arm, whose chip blueprints appear in almost every smartphone in the world and a growing number of personal computers, said it’s expecting fiscal 2023 fourth-quarter earnings of between 28 and 32 cents, with revenue of between $850 million to $900 million. That’s significantly better than the Street’s forecast of 21 cents per share in earnings and $780 million in sales.

Arm is a chip design company that primarily makes money through royalties. Its customers pay those fees to access its designs, which enable them to build Arm-compatible chips. The royalties are usually just a small fraction of the overall chip price.

In a letter to shareholders, Arm said its customers shipped more than 7.7 billion Arm chips in the September quarter, which is the most recent period for which numbers are available.

Arm’s stock gained more than 40% in the hours after the report was first published, before falling back to a 23% gain. That came after the stock had already gained more than 5% during the regular trading session, prior to today’s report coming out.

The company said its royalty based revenue jumped 11% from a year earlier to $470 million, due in part to a recovery in smartphone sales, and also increased sales to automotive companies and cloud computing providers. The company’s growth in the current quarter is also expected to be driven by increased royalty revenue.

Besides making money through royalties, the company also has a nascent licensing business, which involves selling access to more complete chip designs that semiconductor firms can plug straight into their planned chips. By licensing its chip designs, chipmakers can save more time and effort that would otherwise be spent on design. The business is also more lucrative for Arm itself.

License and other revenue came to $354 million in the quarter, up 18% from a year earlier. The company said more of its customers are choosing to license its central processing unit designs to run artificial intelligence workloads.

In a statement, Arm Chief Executive Rene Haas (pictured) said growth during the quarter was driven by the ongoing adoption of what he said is the world’s most pervasive compute platform. “The AI wave drove licensing growth as these new devices require Arm’s performant and power-efficient compute platform,” he explained.

The company is best known for its intellectual property that underlies most of the world’s smartphones, but it has also expanded into chips for PCs and laptops, working with customers such as Nvidia Corp. and Qualcomm Inc. In addition, its chips are becoming more common in data center servers, with companies such as Microsoft Corp. and Amazon Web Services Inc. offering access to Arm-powered virtual machines.

In its letter to investors, Arm said the company is increasing its market share in the cloud server market, and also in the automotive segment. It specifically mentioned the upcoming Nvidia GH200 AI Superchip for data center systems, which incorporates Arm’s CPUs as well as Nvidia’s graphics processing units. In addition, Arm said, more of its customers are adopting its advanced chip designs based on the most powerful Armv9 technology, which generate double the fees of its older Armv8 products.

“Key players like Dell Technologies, Hewlett Packard Enterprise, Lenovo, Quanta and Supermicro are among those using the GH200 to tackle some of the world’s most challenging problems,” Arm wrote in its shareholder letter.

Holger Mueller of Constellation Research Inc. said Arm delivered a record-breaking quarter in terms of revenue, and would have also broken its record in terms of profitability if not for a change in the way it reports stock-based compensation. “Arm saw record demand in the royalty business, with data center, smartphone and automotive revenue all improving,” the analyst said. “Investors’ eyes are now on Q4, and will be hoping to see Arm extend its record-breaking streak streak into the full year.”

TECHnalysis Research analyst Bob O’Donnell told Reuters that Arm’s robust forecast is a good sign, not only for the company, but for the wider chipmaking industry.

Arm, which remains majority-owned by Japan’s SoftBank Group Corp., returned to the stock market in September through a hugely successful initial public offering that saw it raise more than $4.8 billion. SoftBank had previously tried to sell the chipmaker to rival Nvidia, only for regulators to scuttle the deal in 2022.

Photo: Arm/YouTube