Arm posts record quarter as AI chip demand offsets smartphone slowdown, but shares slide

Arm Holdings reported record quarterly revenue on Wednesday, driven by surging demand for chip designs used in artificial intelligence data centers, but its shares fell sharply after the British-based semiconductor design company flagged slowing growth in the royalties it collects from smartphone makers.

The company said in a statement that revenue for its fiscal second quarter, which ended September 30, reached 1.44 billion dollars, up 27 percent from the same period a year earlier and the strongest second quarter in the company's history. The results were detailed in a shareholder letter filed with the Securities and Exchange Commission as an exhibit to a Form 6-K.

A split performance

Arm's two main revenue streams moved in opposite directions. Licensing and other revenue, which the company collects when customers sign up to use its chip blueprints, rose 50 percent to 773 million dollars. Roughly 209 million dollars of that came from a renegotiated agreement with SoftBank Group, Arm's majority owner, according to the shareholder letter filed with the SEC.

Royalty revenue, which Arm earns each time a customer ships a chip built on its designs, grew only 8 percent to 670 million dollars, a marked slowdown from the growth rates the company posted earlier in the year. Arm attributed the deceleration chiefly to weaker smartphone demand, which continues to make up the largest share of its royalty base. Non-GAAP diluted earnings per share were 52 cents, ahead of the 48-cent analyst consensus cited by MarketBeat's summary of the earnings call, while GAAP net income fell 45 percent year over year to 130 million dollars, largely reflecting higher stock-based compensation and acquisition-related charges.

Within the royalty line, the company highlighted one bright spot: royalties tied to data centers more than doubled from a year earlier, and royalties from "physical AI" applications such as automotive driver-assistance systems and in-vehicle infotainment rose 50 percent. Arm said chips based on its architecture now account for roughly 20 percent of global PC shipments, and that its partners shipped more than 10 billion Arm-based chips in the quarter, the first time shipments have crossed that threshold.

A new silicon business

The most closely watched disclosure concerned Arm's own first piece of silicon, a data-center processor called the Arm AGI CPU. Until recently, Arm has made money almost entirely by licensing chip designs to other companies — including Apple, Qualcomm, Nvidia and Amazon — rather than manufacturing or selling finished chips itself. The AGI CPU marks the company's move into selling complete server processors directly to cloud computing customers.

Chief Executive Rene Haas told analysts on the earnings call that the company now has "increased confidence" in generating up to 2 billion dollars of revenue from the AGI CPU across fiscal 2027 and 2028, according to the earnings release furnished to the SEC. Purchase orders for the chip now extend into calendar 2027, and the company said first commercial deliveries remain on track for its fiscal fourth quarter, which ends in March 2027. Chief Financial Officer Jason Child said gross margins on the first generation of the chip should land in a range of 30 to 40 percent, according to the MarketBeat summary of the call.

"Arm is becoming the compute platform of choice as AI transforms every market," Rene Haas said, according to the company's earnings statement.

Arm also said the share of chips running at major cloud computing providers that are based on its architecture rose from roughly 15 percent in calendar 2024 to more than 50 percent in calendar 2025, and that it expects that figure to exceed 60 percent by the end of this year. Amazon, one of Arm's largest data-center customers through its in-house Graviton processor line, reported revenue commitments for Graviton chips up more than twentyfold from a year earlier, the shareholder letter said.

Investors focus on the slowdown

Despite the earnings beat, Arm shares fell 5.3 percent on Tuesday to close at 191.80 dollars, and continued falling in early trading the following morning, down roughly 7 percent further, according to pricing data compiled by StockAnalysis.com. The site's summary noted that brokerages including JPMorgan, Piper Sandler, Wells Fargo and Barclays cut their price targets on the stock after the results while maintaining positive ratings, with Barclays specifically citing a shortfall in royalty revenue relative to its own estimate.

Arm's guidance for the current quarter, ending in December, calls for revenue of 1.54 billion dollars, plus or minus 50 million dollars, which would represent growth of about 24 percent from a year earlier. The company told analysts that royalty revenue is expected to rise only in the low single digits year over year next quarter, which it attributed to continued softness in smartphone shipments and the broader effects of rising memory-chip prices on handset makers' production plans. Non-GAAP earnings per share are projected at 56 cents, plus or minus 4 cents.

• Total revenue: 1.44 billion dollars, up 27 percent year over year
• Licensing revenue: 773 million dollars, up 50 percent
• Royalty revenue: 670 million dollars, up 8 percent
• Non-GAAP EPS: 52 cents, versus 48-cent consensus
• Next-quarter revenue guidance: 1.54 billion dollars, plus or minus 50 million dollars

What's next

Arm's next test will be whether its new data-center chip business can scale fast enough to offset a smartphone royalty base that is growing only in the single digits. The company's fiscal third-quarter report, covering the holiday-season quarter, is expected in early February 2027 and will be the first to show whether early AGI CPU shipments are materializing on schedule. Investors will also be watching Arm's exposure to its two largest end markets — Apple's iPhone line and the broader Android ecosystem — both of which have faced memory-component cost pressure in recent months that has weighed on the wider smartphone chip sector.