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After immediately retreating despite exceeding top and bottom-line forecasts in Q2 (Sep), investors lent Arm Holdings (ARM +3%) a hand out of the gate today, picking it up from premarket lows of -7%. The CPU designer did not post glaring weaknesses from Q2. The smartphone market continued to gradually recover, AI demand remained hot, and the adoption of ARM's latest chips continued to mount. However, given these uplifting trends, ARM's unchanged FY25 (Mar) guidance initially proved inadequate. While the market likely wanted a more rosy outlook to align with the upward momentum unfolding across ARM's operations, it has been quick to shrug off this minor nitpick.

• Since ARM's IPO last year, the company has delivered meaningful quarterly earnings and revenue upside. Q2 was no exception, as ARM registered adjusted EPS of $0.30 on revs of $844 mln, a 4.7% improvement yr/yr.
• Management declared that the demand for AI is everywhere, raising the need for ARM's platform, reflected by a 23% jump in royalty revenue yr/yr to $514 mln in Q2. Supporting double-digit gains is the ongoing smartphone market recovery. However, more important is the content per device. Companies are incorporating more CPUs inside their chips based on ARM's latest v9 architecture, compounding royalty revenue. For example, smartphone unit growth was a mild 4% in the quarter, yet ARM's royalty revenue for smartphones surged by 40%.
• Meanwhile, ARM benefits from its technological advantage of running AI from the edge, e.g., on an iPhone (AAPL), to the cloud, e.g., in NVIDIA's (NVDA) Grace Blackwell platform. ARM is also working alongside other big tech firms, including Meta Platforms (META), on optimizing its Llama 3.2 offering, Microsoft (MSFT) with its Azure Cobalt virtual machines, and Google (GOOG) in its Axion processors.
• Pulling against the AI-led royalty revenue growth was a 15% drop in licensing revenue to $330 mln. Still, the drop outpaced ARM's expectations of a 25% decline. Management mentioned it is seeing fairly broad licensing demand across all markets and sectors. ARM's licensing pipeline acts as a relatively dependable forward indicator for the strength of the business and royalties, making its better-than-expected yr/yr compression a good sign for future growth.
• Still, ARM kept its FY25 financial goals unchanged, targeting adjusted EPS of $1.45-1.65 and revs of $3.8-4.1 bln. The underlying cause was licensing timing, which fluctuates from quarter to quarter. ARM added that the timing of some of its large licensing deals in the works and the shape of subsequent revenue recognition is unclear. However, the company does expect all of these deals to close eventually.

AI underpinned ARM's solid Q2 numbers, while a gradual smartphone market recovery provided further kindling. While the stock has more than doubled YTD, shares currently trade at roughly 20% below all-time highs reached in July. Some nerves may still be lingering regarding the ongoing inventory correction affecting many semiconductors. Also, with around a fifth of revs dependent on China, further uneasiness could be branching from the shaky economic conditions in the region.