Key Highlights

● Revenue came in above the guided range

● Data center royalties roughly doubled

● Smartphone Royalty growth slowed on memory prices

● Modest December-quarter royalty forecast drew a negative share reaction

Arm Holdings plc (NASDAQ:ARM), a chip-design group closely watched among technology stocks, reported fiscal second-quarter results in early November that exceeded its guidance for revenue, operating expenses and adjusted earnings per share. The headline growth, however, leaned heavily on licensing. License and other Revenue rose by half from the prior-year quarter, while royalty revenue, the recurring stream tied to chips shipped by partners, increased at a much slower pace.

That split shaped the response. Its article noted that royalty growth came in short of the low-teens rate Arm had guided in July, and that Chief Financial Officer Jason Child told analysts he expected December-quarter royalty growth in the "low single digits year on year."

Chief Executive Rene Haas struck a confident tone in the Shareholder letter, describing the period as the latest in an extended run of revenue growth above a fifth and declaring that "Arm is becoming the compute platform of choice as AI transforms every market." The gap between that long-range message and the near-term royalty picture sits at the center of how the report was received.

Top-Line and Margin Details

Total revenue for the quarter ended in September rose by more than a quarter from a year earlier and marked the highest second-quarter figure in company history, the letter said. It also landed above the top of the guided range. First-half revenue grew by about a quarter as well.

Annualized contract value, a committed-fee metric rather than recognized revenue, climbed at a low-double-digit rate. Gross margin remained extremely high, at around the upper-nineties on both GAAP and non-GAAP bases, though each measure dipped slightly from the prior-year period.

Non-GAAP operating expenses came in just under the guided level, although they still rose by nearly a fifth from the prior year. Research and Development accounted for most of the spending, with the letter pointing to engineering headcount as the main driver of the increase, and non-GAAP selling, general and administrative costs rose by about a quarter. GAAP operating expenses grew more quickly, in line with revenue.

Operating income increased on both bases. The GAAP Operating Margin slipped slightly, while the non-GAAP operating margin expanded to the mid-forties. Non-GAAP Net Income grew by more than a third and non-GAAP diluted Earnings Per Share rose from the prior-year figure, finishing above the guided midpoint and its stated band.

Why GAAP Profit Went the Other Way

GAAP net income fell by nearly half from the prior-year quarter, and GAAP Diluted Earnings per Share declined accordingly. The letter explained that the prior-year period included a substantial gain on a divestiture, which inflates the comparison base. Non-GAAP results, which exclude stock-based compensation and other items, moved in the opposite direction.

Cash generation also weakened in the quarter. Operating Cash Flow fell from the prior-year figure and non-GAAP free cash flow dropped by a large margin, although the trailing-twelve-month measure edged higher and the first-half figure was above the same period a year earlier. Acquisition payments were recorded during the quarter, and the Balance Sheet ended the period with cash, equivalents and short-term investments well into the billions of dollars.

Management's own cautions are relevant to reading these figures. The letter says license results depend on the timing and size of large deals, which leads to quarterly swings, and that non-GAAP guidance is not reconciled to GAAP. Investors comparing quarters therefore face a licensing line that can move unevenly, as it did here.

Memory Prices Reach the Royalty Line

The letter attributed royalty growth to higher per-chip rates from newer architecture and Compute Subsystems designs and to Data Center deployments, partly offset by weaker smartphone Demand linked to memory pricing. A July earnings-call summary had flagged similar pressure, with management saying elevated memory prices were weighing on handset demand across segments and lowering its full-year royalty growth expectation from an earlier level.

The pressure has broader industry roots. In February, IDC forecast a steep decline in global smartphone shipments for this year, the sharpest one-year fall in more than a decade, and quoted IDC's Nabila Popal as saying the memory crisis would cause more than a temporary decline. Counterpoint Research issued a similar forecast, according to the report, and IDC expected memory prices to stabilize only by the middle of next year.

Market data adds a measure of exposure. It reported that smartphone chips made up a substantial portion of Arm's last fiscal year's royalty revenue. It also noted that Qualcomm (NASDAQ:QCOM), a meaningful customer, recorded a double-digit decline in handset chip revenue in its September quarter and flagged rising input costs including memory. The article's author said he did not expect Arm's phone royalties to recover before Qualcomm's handset guidance does, a personal view rather than a company forecast.

Higher royalty rates offer a partial cushion, because newer architectures and subsystems command more per chip. The July summary described this adoption as partly offsetting lower unit sales. The latest quarter suggests the offset was not enough to preserve the earlier growth rate, particularly given how large the handset category remains within the royalty total.

The Data Center Counterweight

Data center royalties roughly doubled from the prior-year period, the letter said, continuing a trend noted in the July call summary. Arm reports that its share of servers among leading hyperscalers has risen rapidly and expects it to climb further by the end of this calendar year. The company cites partner programs including Google (NASDAQ:GOOGL) Axion, AWS Graviton and Microsoft (NASDAQ:MSFT) Cobalt.

NVIDIA's Vera processor also features in the letter, which says it is generally available on Oracle (NYSE:ORCL) Cloud Infrastructure and in production with OpenAI. Market commentary highlighted the same point. Arm also described a NVIDIA security and isolation architecture that pairs Arm-based CPUs with Arm-based data processing units.

Arm's thesis is that AI agents shift work back toward general-purpose processors, because agents run software, call tools and coordinate tasks between accelerator calls. It also points to power as a constraint, citing a Morgan Stanley (NYSE:MS) projection of a large global power shortfall, and argues that more compute per watt addresses the issue. These statements reflect management's framing and remain to be proved out across a full cycle.

The company introduced a new generation of Neoverse compute subsystems during the period, claiming improved performance per socket and per watt relative to the prior generation. Such products are significant because royalty rates tend to rise as partners adopt more complete designs, a dynamic management repeatedly cites.

A Chip of Its Own, and the Risks That Come With It

The AGI CPU, launched in March, represents a major strategic expansion from licensing into production silicon. Arm said purchase orders from multiple customers extend through next calendar year and that first commercial deliveries remain on track for its fiscal fourth quarter. Oracle plans to offer instances based on the chip during next calendar year, the letter stated.

Management said it has raised its confidence in the revenue opportunity across the current and following fiscal years, citing Supply and customer mix. In July, per the Nasdaq-published call summary, management had described demand above the amount it was then willing to commit to, noting that supply remained constrained. That summary also indicated that first-generation gross margin on this product would sit far below the licensing-heavy corporate average, rising over the following couple of years.

Arm cited third-party testing presented at the Open Compute Project summit that showed a performance-per-rack advantage against an AMD (NASDAQ:AMD) EPYC processor. The results come from a testing firm and were reported by Arm in its own letter, so they represent a favorable comparison selected by the company.

The strategic move brings execution risk, which the letter itself flags. Dependence on supply and capacity expansion, as well as customer mix, are named as factors. The move also positions the company alongside customers that build chips on its designs, adding another element to watch as deliveries begin.

PCs, Vehicles and Other Edge Markets

Beyond the data center, Arm says partners' PCs based on its architecture have reached about a fifth of global shipments. It cited Google's Googlebook laptops and NVIDIA's RTX Spark as examples of new platforms using its designs. In mobile, a new compute subsystem aimed at agentic workloads has been adopted by OPPO and vivo, and a new Mali graphics processor is being adopted by Xiaomi, the letter stated.

Physical AI, which covers automotive and robotics applications, produced royalty growth of about half from a year earlier, driven by driver-assistance and in-vehicle infotainment systems. Arm also launched a design program for this area with a large group of partner companies and pointed to a robocar from Tensor that integrates a very large number of Arm CPU cores.

Across the ecosystem, partners reported shipping a very large Volume of Arm-based chips in the quarter, up from a year earlier. These unit figures show the breadth of the installed base, although the relationship between units and royalties varies widely by product and royalty rate.

The December-Quarter Forecast in Context

Arm guided third-quarter revenue above the level just reported, with a stated range around the midpoint, and non-GAAP earnings per share above the latest result. Non-GAAP operating expenses were projected to rise sequentially. The company said royalty growth is expected to accelerate as current licensing momentum turns into production designs, though the near-term commentary from its finance chief pointed to a slower December quarter.

The tension is therefore one of timing. Licensing strength today can translate into royalties only once partners bring designs to market, a process that takes time. In the meantime, the handset cycle weighs on current royalty receipts. Market commentary said the stock traded at a high forward earnings multiple before the drop, and that the multiple remained elevated after it, which helps explain the sensitivity to any slowdown in the recurring line.

Market data author also noted that Nvidia (NASDAQ:NVDA) was scheduled to report later in November, an event that may offer further information about demand for Arm-based data center processors. Early February was identified as the timing of Arm's next quarterly report, when another reading on royalty growth will become available.

How the Royalty Trend Shifted Across the Year

The latest report is easier to read beside the prior quarter. In the fiscal first quarter, according to the Nasdaq-published call summary, royalty revenue and licensing revenue grew at similar rates, each above a fifth. By the second quarter the pair had separated, with licensing accelerating and royalty growth falling to the high single digits. That is the shift the market focused on, rather than total revenue, which continued to grow at a similar pace.

Management had already begun to prepare investors for a softer royalty line. In July, it lowered its full-year royalty growth expectation to the high teens and guided the second quarter to growth in the low teens. The result fell short of that second-quarter marker, and the guidance offered for the December quarter is lower still, according to market data of the call. The article did not state whether the full-year expectation had been formally updated, so no conclusion on that point is drawn here.

The competitive picture also moved during the year. The July summary noted that Qualcomm had announced plans to enter the AI data center CPU market, and described AWS plans for a very large deployment of its latest Graviton cores. Those references show that the data center opportunity is attracting both customers and new entrants using Arm designs, which feeds royalties when such products reach volume production.

Shareholder Structure and Stated Risks

Arm's letter lists several other factors. SoftBank Group Corp. is the controlling shareholder, and its interests may differ from those of other shareholders. The company also depends on a limited number of customers and on partners to market end products. A July summary recorded that part of the prior quarter's licensing revenue came from an agreement with SoftBank.

Other risks flagged in the forward-looking statements include competition, changes in technology, intellectual property protection and litigation, royalty verification, foreign exchange, tax rate changes, cybersecurity, data protection requirements, and broader macroeconomic and geopolitical conditions. The company also names the risk of failing to manage growth or acquisitions.

Arm announced in early October that it would release results in early November, with a call that afternoon Pacific Time. Its newsroom notice said a replay would be posted on its investor site and remain available for several weeks, giving interested readers access to the fuller discussion of the royalty and silicon commentary reported here.