Arm sees 2Q25 growth on smartphone recovery and AI momentum

Arm has reported better-than-expected revenue driven by strong licensing and royalty performance. The company saw a 40% year-over-year increase in smartphone royalty revenue, while continued demand for AI solutions fueled significant licensing growth.

On November 6, Arm reported total revenue of US$844 million for the second quarter of fiscal year 2025, surpassing the US$810.9 million estimated by Bloomberg.

License and other revenue reached US$330 million, exceeding expectations of US$300.2 million, while royalty revenue totaled US$514 million, above the US$508.9 million forecast. Operating expenses were US$494 million, slightly below the estimate of US$499.4 million, and operating income came in at US$326 million, ahead of the US$286.7 million estimate.

For the third quarter, Arm expects revenue to range from US$920 million to US$970 million, with Bloomberg's consensus forecast at US$950.9 million, above the midpoint of the guidance. Operating expenses are projected to be approximately US$525 million, in line with the estimated US$527.4 million.

For fiscal year 2025, Arm maintains its revenue outlook of US$3.8 billion to US$4.1 billion, with projected operating expenses of approximately US$2.05 billion.

According to Bloomberg Intelligence, Arm's results showed slightly better-than-expected sales, with total revenue surpassing estimates. However, the company's outlook for the third quarter indicates broad-based weakness, particularly in the industrial and automotive sectors, which could counterbalance improved smartphone expectations for the December quarter.

Bloomberg Intelligence added that Arm's full-year guidance remains unchanged at US$3.95 billion, indicating a lack of significant upside in the near term. The company's cautious outlook reflects challenges across various end markets, which appear to offset the moderately positive momentum in smartphone demand.

Qualcomm litigation and strategic developments

Regarding the litigation with Qualcomm, Rene Haas, Arm's CEO, explained that while the litigation is ongoing, Arm has not yet canceled the license but instead sent Qualcomm a notification letter about its intention to do so due to Qualcomm failing to obtain the required consent to assign the new deal license. He emphasized that obtaining consent is critical to Arm's licensing agreements and that Arm needs to protect the integrity of these contracts for the sake of the broader Arm ecosystem.

Jason Child, Arm's CFO, reassured that there have been no changes to Arm's revenue recognition or operating expenses due to the situation. He noted that Arm's financial forecast already considers the possibility of not prevailing in the case. Therefore, they expect no changes in their revenue or expenses unless the situation changes significantly.

Over 300 billion Arm-based chips have been shipped, marking a significant milestone in the company's history. Strong licensing revenue reflects customers' ongoing investments in AI and demonstrates Arm's global impact.

Meanwhile, royalty revenue growth is driven by higher value per chip, with Arm v9 now accounting for 25% of royalty revenue, up from 10% year over year. Arm's royalty revenue from smartphones grew by 40% in the past quarter despite only a 4% increase in unit shipments.

Haas emphasized that AI is now ubiquitous, with Arm being the only compute platform capable of running AI from the edge to the cloud. Notable developments include the integration of Arm CPUs with Nvidia's Blackwell GPU in Grace and new shipments from Microsoft Azure Cobalt and Google GCP Axion in general availability. Additionally, Arm partnered with Meta to optimize Llama 3.2, using Arm libraries to enable faster on-device AI processing.

The CEO also highlighted that the company is witnessing broad licensing demand, with increased compute requirements fueling innovation and research across various industries. He noted that the demand for compute resources, especially in AI applications like training and inference across data centers, networks, and edge devices, significantly contributes to the growth in licensing activity. Haas also emphasized that licensing engagements, including Compute Subsystems (CSS) licenses, have been stronger than initially anticipated.

Source: Arm, November 2024

Source: Arm, November 2024