ARM SECOND QUARTER FISCAL YEAR 2027 - ARM HOLDINGS PLC

Financial Performance:

• Total revenue reached a record $1.44 billion in Q2 FY27, up 27% year-over-year (YoY), marking the fifth consecutive quarter of >20% growth.
• License and other revenue surged 50% YoY to $773 million (a record Q2), driven by new ARM Total Access (ATA) agreements and compute subsystem licenses; SoftBank contributed $209 million ($209M) to this figure.
• Royalty revenue grew 8% YoY to $670 million (record Q2), with data center royalties doubling YoY and physical AI royalties growing 50% YoY.
• Non-GAAP earnings per share (EPS) increased 33% YoY to $0.52.
• Non-GAAP operating margin expanded 300 basis points to 44.2%.
• Operating expenses rose 19% YoY to $774 million due to continued R&D investment in the ARM AGI CPU and compute subsystems.
• Generated $1.1 billion in free cash flow over the trailing 12 months.
• First-time quarterly shipment of over 10 billion ARM-based chips, up $1.5 billion YoY.

Guidance and Future Outlook:

• Q3 FY27 revenue guidance is set at $1.54 billion (+/- $50 million), implying ~24% YoY growth at the midpoint.
• Q3 non-GAAP EPS guidance is $0.56 (+/- $0.04).
• Confidence in ARM AGI CPU revenue has increased from $1 billion to up to $2 billion across fiscal years 2027 and 2028, supported by secured supply and customer purchase orders extending through calendar 2027.
• Long-term outlook anticipates data center ARM-based server market share exceeding 60% by end of calendar 2026.
• Expected to see mobile royalty growth accelerate into double digits next year despite flat unit growth forecasts, driven by higher royalty rates and CSS adoption.
• ARM AGI CPU is expected to reach a revenue run rate of ~$2 billion annually by fiscal year 2029, with potential for further upside.

Business Segments and Product Lines:

• IP Business: Strong licensing momentum with 60+ active ATA subscriptions; new deals signed with major customers including first-time ATA license acquisitions.
• Silicon Business (ARM AGI CPU): Launched in March; secured purchase orders through 2027; first commercial deliveries on track for fiscal Q4 2027. Partners include Oracle Cloud Infrastructure (OCI), which now offers NVIDIA Vera CPUs and plans ARM AGI CPU instances in 2027.
• Edge AI: ARM-based PCs represent 20% of global shipments; launched CSS for Mobile 2 improving agentic AI performance by 70% and a new AI-native GPU offering 4x frame rates.
• Physical AI: Launched "ARM Total Design for Physical AI" involving 80+ companies; royalty growth driven by automotive and robotics.
• Data Center: Triple-digit royalty growth expected; major hyperscalers (Google Axion, AWS Graviton, Microsoft Cobalt, NVIDIA) expanding ARM-based infrastructure.

Market and Competitive Landscape:

• ARM AGI CPU delivers approximately 2x performance per watt compared to AMD EPYC 9755 (per Signal 65 testing), positioning it to address the projected 38 gigawatt global data center power shortfall by 2028.
• Market share of ARM-based servers at top hyperscalers tripled from 15% (Cal 2024) to >50% (Cal 2025), with expectations to exceed 60% by end of Cal 2026.
• Transition occurring from x86 to ARM for head-node CPUs connecting to accelerators (e.g., Google converting to Axion for TPU v8).
• Competition with x86 focuses on performance per rack and system-level efficiency in custom SoC designs; ARM AGI CPU revenue targets ($2B in 27-28) reflect confidence in winning against standard x86 products.
• Total addressable market for agentic AI workloads projected to grow to $100B+ by 2030, potentially higher.

Risks and Challenges:

• Supply Chain Constraints: Securing wafer supply, substrates, testers, and memory for the AGI CPU ramp is a critical focus, though confidence in meeting demand has increased.
• Smartphone Market: Headwinds from higher memory prices are pressuring unit sales in mid-to-low tiers; Edge AI royalties were flat YoY, though recovery is expected in Q4.
• Cost Pressures: Rising memory prices and supply chain complexity may exert margin pressure on system costs; ARM AGI CPU gross margin for the first version expected to be 30-40% vs. industry standard of 50%+.
• Concentration: Data center royalties heavily reliant on a few major customers (Amazon, Google, Microsoft, NVIDIA).

Management Commentary and Tone:

• Tone is highly confident and optimistic, describing the quarter as "record-breaking" and the business as having "two powerful growth engines" (IP and Silicon).
• Management emphasized that demand for the AGI CPU is "incredibly strong," exceeding expectations, and highlighted the strategic advantage of ARM's flexible compute platform for agentic AI.
• Confirmed that the licensing surge is a leading indicator for future royalty acceleration.
• Management stressed that the AGI CPU is a 5-10 year endeavor, not a one-year project, and reiterated strong relationships with supply chain partners like TSMC and memory vendors.

Analyst Questions and Answers:

• AGI Supply & Customers: Confirmed Meta is the chief customer with multiple others beyond; supply chain (wafer, substrate, memory) is being actively secured to support the $2B revenue target.
• Royalty Rates: Growth rates vary by segment; mobile is flat/slow, server is double-digit, and physical AI is 50%+. Overall rates trending up due to mix shift to higher-value server chips.
• Data Center Market Share: Expected to reach 60% by end of 2026 driven by design wins from Google, AWS, Microsoft, and NVIDIA platforms.
• AGI Revenue Timing: First AGI CPU revenue expected in Q4 FY27; minimal contribution anticipated in Q3 or December quarters.
• Second-Gen AGI: No specific schedule disclosed, but expected to tape out late this year/early next year with a 18-24 month cadence; focus includes higher core counts (256-500+) and expanded networking/IO capabilities.
• Licensing Structure: Future licensing will predominantly be ATA and CSS; traditional architecture licenses are rare. Pipeline is stronger than anticipated.
• Gross Margins: First-gen AGI CPU gross margins estimated at 30-40%; expected to improve to 50%+ on subsequent generations as in-house capabilities expand.
• Customer Concentration: Top four hyperscalers (Amazon, Google, Microsoft, NVIDIA) command the majority of data center royalties.

Other Key Points:

• Oracle Cloud Infrastructure (OCI) is a key example of the synergy between IP licensing and silicon sales, hosting both NVIDIA Vera (ARM-based) and future ARM AGI instances.
• The total ecosystem includes over 30 million developers.
• Google Book is a new category of AI-native laptops with ARM as the primary compute platform.
• Management expects the mobile business to stabilize with flat unit growth but double-digit royalty growth due to technology mix shifts.