By Juby Babu and Max A. Cherney
July 29 (Reuters) - Arm Holdings signaled strong demand from AI on Wednesday, yet shares slid 8% after hours in choppy trade even though the intellectual property and chip designer forecast second-quarter revenue above Wall Street estimates.
The boom around AI and more recently the demand for agents - programs that can act with little or no human direction - has boosted demand for Arm's chip architecture, which powers an increasing number of data center central processing
units (CPUs). Cloud giants such as Alphabet and Amazon.com build custom AI chips, which have boosted the company's licensing revenue and royalties as more complex chips are shipped to data centers.
"The more inference workloads you run, that creates work that only CPUs can do," Arm CEO Rene Haas told Reuters.
Inference refers to the process of generating an answer when a user queries a chatbot such as Anthropic's Claude.
Arm sells intellectual property that other chip companies license and pay royalties on for each unit shipped, but has recently decided to make its own central processing unit for the data center.
Higher demand from big tech company chips, along with new entrants such as Nvidia and its Vera processor, helped the company report higher-than-expected revenue, Haas said. Qualcomm also launched its C1000 data center chip, which does not contribute to Arm revenue now but will in the future, he said.
Haas said the company has shipped 1.5 billion Arm cores for the data center — an important data-crunching portion of each chip — in the last six years, but about 30% were shipped in the last nine months.
"Growth is accelerating," Haas said.
Revenue from royalties rose 22% to $715 million in the first quarter, while licensing revenue increased 23% to $574 million.
The company's spending plans and forecast remain unchanged, finance chief Jason Child said during a conference call on Wednesday.
Arm expects smartphone royalties to drop next quarter and forecast second-quarter growth of roughly 10% and 15%, Child said.
POWER-EFFICIENT DESIGNS
Arm's chip designs are prized for their power efficiency, a critical advantage for data center operators looking to manage the soaring energy costs and heat generated by running massive AI models.
Its AGI CPU, a new AI data center chip unveiled in March, is exceeding initial expectations, with demand surpassing $2 billion across fiscal years 2027 and 2028, the company said. It has already delivered the product to multiple customers.
Cloud firm Oracle has agreed to buy the new chip, Haas said. The CEO did not disclose the contract value.
"We have new customers in North America and China," Haas said, adding that the company can now secure supply for more than $1 billion worth of chips.
"I feel better about (supply) than I did 90 days ago," he said.
Jefferies analysts forecast sales of the new chip reaching $18 billion in fiscal 2031, surpassing the chip designer's own projection of $15 billion. Haas said the company was not changing any forecasts on Wednesday.
Arm projected second-quarter revenue of $1.38 billion, above analysts' average estimate of $1.34 billion, according to data compiled by LSEG.
The British chip designer expects second-quarter profit of 47 cents per share, adjusted for stock compensation, among other things, compared with analysts' expectations of 43 cents per share.
The company reported revenue of $1.29 billion and adjusted per-share earnings of 45 cents for the first quarter. Analysts expected revenue of $1.26 billion and adjusted profit of 40 cents a share.
(Reporting by Juby Babu in Mexico City; Editing by Sahal Muhammed and Rod Nickel and David Gregorio)
