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Arm Holdings (ARM) delivered strong Q2 growth and expanding adjusted operating margins, although smartphone pressure limited royalty growth and quarterly cash generation weakened. Its Q3 outlook calls for further sequential revenue growth alongside higher operating expenses, while management expressed greater confidence in the emerging Arm AGI CPU business.

• Q2 revenue increased 27% yr/yr to $1.443 bln, marking five consecutive quarters above 20% growth, while non-GAAP EPS rose 33% to $0.52. Q3 guidance calls for revenue of $1.49-$1.59 bln and non-GAAP EPS of $0.52-$0.60, with non-GAAP operating expenses increasing to approximately $825 mln from $774 mln.
• License and other revenue increased 50% to $773 mln, reflecting strong IP demand, backlog contributions, and the timing and size of high-value agreements. Annualized contract value grew a more moderate 12% to $1.79 bln, highlighting the distinction between recognized revenue and normalized licensing commitments.
• Royalty revenue increased 8% to $670 mln as Armv9, CSS adoption, and data-center deployments offset some smartphone pressure from higher memory pricing. Data-center royalties doubled and Physical AI royalties increased 50%, demonstrating substantially stronger growth outside smartphones.
• ARM signed four additional CSS licenses for data-center and smartphone chips. Partners shipped more than 10 bln Arm-based chips during the quarter, approximately 1.5 bln more than a year earlier, expanding the installed base supporting future monetization.
• Management became more confident in achieving up to $2 bln of cumulative chip revenue across FY27-FY28, supported by additional supply and customer mix. Purchase orders from multiple customers extend through calendar 2027, with first commercial deliveries expected in fiscal 4Q27. These are direct silicon sales, distinct from IP licensing and royalties.

Briefing.com Analyst Insight

ARM’s results reveal divergent growth trends: data-center and Physical AI royalties are expanding rapidly, while smartphone exposure restrains overall royalty growth. Licensing strength supports future deployments, but the smaller increase in annualized contract value cautions against extrapolating the quarter’s 50% growth rate. Adjusted margin expansion demonstrates operating leverage, although weaker quarterly cash conversion and substantial share-based compensation complicate the earnings-quality assessment. AGI CPU expands ARM’s revenue opportunity while introducing manufacturing, delivery, and working-capital requirements that differ from its IP business. Sustaining profitable growth therefore depends on broader royalty acceleration, disciplined spending, and converting silicon purchase orders into cash-generating shipments.