Q2 2025 Earnings Summary
- ARM's Version9 adoption is expected to significantly increase over the next year, with the majority of mobile phones moving to Version9, leading to higher royalty rates. This includes increased adoption in PCs as more Windows on ARM products are introduced, and in the data center, where Version9 is used extensively.
- Adoption of ARM's Neoverse in the data center is anticipated to be very strong, driven by the availability of general-purpose compute instances using ARM CPUs (e.g., AWS Graviton, Microsoft's Cobalt, Google's Axion). ARM solutions provide 50% to 60% better power and efficiency compared to x86, accelerating adoption and increasing royalty revenues.
- ARM is confident in achieving a 50% market share in PCs over the long run, with growth expected over the next couple of years as more ARM-based devices are introduced across various segments, including thin-and-light, mid-price, and gaming laptops.
- The adoption of Arm's Version 9 (v9) architecture has stalled in the most recent quarter, with v9 penetration remaining flat quarter-over-quarter, which could impact future royalty revenue growth.
- Arm has reduced its royalty revenue growth guidance for the year to high teens from earlier expectations of low to mid-20% growth, suggesting a potential slowdown in royalty earnings.
- Ongoing litigation with Qualcomm over architectural license agreements poses a risk to future revenues and could increase operating expenses due to legal costs, depending on the outcome of the case.
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Royalty Growth and v9 Adoption
Q: Why did v9 conversion stall and royalty growth guidance decrease?
A: Management stated that v9 adoption is progressing well, with strong uptake in mobile, NeoVerse products, and initial shipments from Apple. Quarter-to-quarter adoption rates may not look linear but will increase steadily over time. Royalty growth will continue throughout the life of v9 due to value-based pricing from multiyear improvements and higher rates from CSS, which can be double or more than standard v9 cores. -
Qualcomm Litigation Impact
Q: Any revenue or expense impacts from Qualcomm litigation?
A: Management indicated that while they can't comment much due to ongoing litigation, they have sent a notification to Qualcomm regarding cancellation of the architectural license due to breach of contract. Their forecast already considers that they may not prevail in the case, so there are no changes to revenue recognition or operating expenses at this point. -
PC and Smartphone Outlook
Q: When will PC and smartphone volumes grow? Is 50% PC market share goal still valid?
A: Management is confident in PC market growth over the next couple of years and stands by the 50% market share goal in PCs. Growth will come as more Arm-based devices across price points enter the market. They are bullish on demand and see their products being equipped to run AI applications, though it's early days for AI PCs. -
Data Center Growth Prospects
Q: How important is networking and data center business for royalties and licensing?
A: Management expects a strong trajectory for Arm's NeoVerse adoption in network and data center over the next years. With general availability of Arm-based instances on Azure (Cobalt) and GCP (Axion), and power efficiency 50%-60% better than x86, they anticipate very good results. They believe this will accelerate Arm's data center adoption due to total cost of ownership advantages. -
Licensing Backlog Potential
Q: Can the team grow its backlog this fiscal year?
A: Management is seeing increased demand for Arm technology across markets due to AI and increased compute needs. Licensing demand is stronger than anticipated, acting as a good forward indicator for business strength and future royalties. However, they don't foresee a significant increase in backlog but focus is on the 23% year-on-year royalty growth seen in the quarter. -
Expansion of ATA and CSS
Q: Is the TAM for ATA and CSS larger now?
A: Management believes the majority of their customer base can move to some version of ATA, expanding the potential market. Currently over 50% of license revenue comes from ATA, with expectations to reach 80%. Annual price increases of roughly 7% per year and contract terms of around three years provide growth opportunities. -
China Royalties and v9 Penetration
Q: Impact of China's smartphone mix shift and v9 penetration?
A: They've seen strength in China's handset numbers, with local brands like Xiaomi, Oppo, and Vivo showing very good growth. In the premium flagship market, moving to Version 9, which will also reach the midrange, the majority of products in China are transitioning to Version 9. -
CSS Adoption in Smartphones
Q: Could CSS reach 50% of smartphone market in few years?
A: Management believes so, as CSS reduces time to market and increases design confidence. Given the relentless annual product cycle and increasing chip complexity, CSS can reduce development time by months. They've seen very good adoption and expect to reach 50% market penetration. -
Licensing Upside and RPO Trend
Q: What contributed to better-than-expected licensing? How is RPO trending?
A: There were no pull-forwards; the upside was about $35 million higher than guidance. They had guided to a 25% decrease, but actually had a 15% decrease, due to tough comps with large deals from a year ago. RPO stepped up sequentially 10%, marking the second-highest quarter ever, indicating a healthy trend. -
v9 Mix Growth Outlook
Q: Should we expect v9 mix to continue growing?
A: Management assures that v9 penetration will increase significantly, from 10% a year ago to 25% now, and expects it to be considerably higher in a year. Growth will be driven by more v9 in PCs as more Windows on Arm products are introduced, and the natural progression in mobile phones adopting v9 across all segments. They have 3-5 year visibility on product rollouts and are confident in the upward trend.