Arm's performance far exceeded expectations, with its stock soaring 40% after hours. "Almost every smartphone has Arm technology."

Arm announced its third-quarter financial results after the market closed on Wednesday, showing that both revenue and operating profit exceeded expectations. The fourth-quarter and full-year performance guidance also exceeded expectations, indicating that the company's strategic efforts to expand its business beyond the smartphone field are helping to drive growth and improve profitability. The strong performance stimulated a 40% surge in the company's stock price after hours.

According to the financial report, Arm's revenue in the third quarter was $824 million, a year-on-year increase of 14%, higher than analysts' expectations of $760 million. The adjusted operating profit was $338 million, higher than analysts' expectations of $274.4 million. Licensing revenue in the third quarter was $470 million, a year-on-year increase of 11%, higher than analysts' expectations of $448.9 million. Net profit was $87 million, with an adjusted EPS of $0.29, higher than analysts' expectations of $0.25.

Arm expects fourth-quarter revenue to reach $850-900 million, higher than the average analyst expectation of $778 million. The adjusted EPS is expected to be $0.28-0.32, higher than analysts' expectations of $0.21.

The full-year adjusted EPS is expected to be $1.20-1.24, exceeding analysts' expectations of $1.05. The company originally expected $1.00-1.10. Full-year revenue is expected to be $3.16-3.21 billion, higher than the company's original forecast of $2.96-3.08 billion. Full-year adjusted operating expenses are expected to be approximately $1.70 billion, lower than the company's original forecast of $1.77 billion.

Arm's stock rose 16.8% after the US market closed, with the increase once expanding to 40% and then narrowing to around 30%. So far this year, Arm has risen 2.5%.

This optimistic outlook reflects the efforts of CEO Rene Haas to expand the company's business into more areas, including server chips. Haas stated that the smartphone market now accounts for less than one-third of the company's sales, highlighting his success in diversifying investments. Arm stated that its chip design technology is used in almost every smartphone and many PCs, which helps increase patent revenue. Its customers shipped 7.7 billion Arm chips in the third quarter. In terms of overall revenue, the Chinese market accounts for approximately 25%.

Arm plays a unique role in the semiconductor industry, licensing software for basic instruction sets used to communicate with chips. The company also provides so-called design modules that allow chip companies like Qualcomm to use these modules to build their products.

In recent years, Arm has emphasized its patent licensing business, selling the rights to access more complete designs. Semiconductor companies can integrate these designs into the chips they design, saving time and effort for chip manufacturers and making it more profitable for Arm than just collecting royalties. Arm's third-quarter royalty revenue increased by 11% YoY, driven primarily by the recovery of the smartphone market and increased sales to automotive companies and cloud service providers, supported to some extent by the surge in demand for artificial intelligence (AI). Arm expects future growth to be driven by royalty revenue.

Under Haas's leadership, Arm has been transitioning towards providing a more complete offering that can directly enter the manufacturing stage. This transformation has made it more valuable to certain customers, such as cloud computing companies like Amazon, but has also made Arm more of a competitor to some traditional customers, such as Qualcomm.

Arm's licensing and other revenue amounted to $354 million, an increase of 18% YoY. Arm states that more companies are choosing to license its CPU designs for running AI and that the company charges higher licensing fees for advanced designs.

Currently, SoftBank Group Corp. still holds a 90% stake in Arm, having acquired Arm for $32 billion in 2016. Arm's IPO last year raised $4.9 billion, making it the largest IPO on the US stock market in 2023.

Arm's customer list spans the entire technology industry. Apple uses Arm instruction sets to design processor chips for iPhone and Mac computers, Amazon relies on Arm's designs to develop its Graviton server processors for data centers, and Qualcomm and MediaTek are major users of Arm's smartphone processor blueprints. Other customers include Google, Microsoft, and NVIDIA.