Overview
Since the Report − 10.8%
Revenue grew 27.1% year over year, EPS beat the estimate by 10.6%; the stock fell 13.1% in its first reaction.
- RevenueQ2
- $1.44B
- Estimate $1.38B · Beat by 4.6%
- EPSAdjusted
- $0.52
- Estimate $0.47 · Beat by 10.6%
Verdict
BUYArm posted record second-quarter revenue of $1.44B, beating estimates by 4.6%, and adjusted EPS of $0.52, beating by 10.6%. Licensing revenue up 50% carried the growth, while smartphone-linked royalty revenue fell short and the stock dropped 13.1% the next day. The line to watch next is third-quarter royalty revenue.
Close on Report DayNov 4
$191.80▼ 13.1%Report-Day Move
- Market Cap(Today)
- ≈ $183 B
- 1Y Return(At Report)
- + 19%
- P/E(At Today's Price · $2.00 · Trailing 12M)
- 85.5
- Net Margin(Trailing 12M)
- 20.3%
Earnings Summary
In 30 Seconds- Revenue of $1.44B beat estimates by 4.6%, and adjusted EPS of $0.52 beat by 10.6%.
- Licensing revenue rose 50%, while royalty revenue grew only 8% and missed estimates.
- The stock fell 13.1% the next day as memory pressure in phones slowed royalties.
The Numbers
Licensing Revenue
$773M
▲ 50% YoY · Record
Royalty Revenue
$670M
▲ 8% YoY Below Estimate
Adjusted Operating Margin
44.2%
▲ 3.1 Points YoY
Stock Reaction
▼ 13.1%
Close to Close · Price Nov. 4
Quarterly Revenue ($ Billion)
1.14
Q2 26 · $1.14 B
1.24
Q3 26 · $1.24 B · QoQ + 9.4%
1.49
Q4 26 · $1.49 B · QoQ + 20.0%
1.29
Q1 27 · $1.29 B · QoQ − 13.5%
1.44
Q2 27 · $1.44 B · QoQ + 11.9% · YoY + 27.1%
1.49–1.59
Q3 27E · 1.49–1.59 · QoQ + 6.7% · YoY + 24.0%
- Q2 26
- Q3 26
- Q4 26
- Q1 27
- Q2 27
- Q3 27E
Q3 FY27 Company Guidance
- Revenue (Q3)1.49 – 1.59 billion1.49 billion1.59 billion
Midpoint 1.54 · Market Expectation 1.530.7% Above Estimate · In Line ✓
- Adjusted EPS (Q3)0.52 – 0.60 $0.52 $0.60 $
Midpoint 0.56 · Market Expectation 0.551.8% Above Estimate · In Line ✓
- Adjusted Operating Expenses825 million
Actual This Quarter $774M6.6% Sequential Increase ▲
How to Read the Chart
The blue band is the company's low-high range; its length shows how much room the company left itself. The black triangle and the line beneath it mark where the market expected, and the notch in the band is the range's midpoint. The triangle appears only where a market expectation is known. When the company gave a single number rather than a range and no market expectation is known, that row gets no band at all: there is no length to measure and no position to compare. Axis is ±8.2% around the midpoint.
Segment and KPI Data
Revenue by Segment
- License and Other$773 MShare 53.6%▲ 50.0% YoY
- Royalty$670 MShare 46.4%▲ 8.0% YoY
Key Metrics
Free Cash Flow
$110 M
▼ 73.0% YoYShareholder Letter
Operating Cash Flow
$207 M
▼ 63.0% YoYShareholder Letter
Annualized Contract Value
$1.79 B
▲ 12.0% YoYShareholder Letter
Shares are computed over the segment total: $1.44 B. Source: Shareholder Letter.
Metrics come only from the company's own filings; each one names the document it was taken from.
“Our data center royalties doubled year over year. Our confidence in achieving up to $2 billion of revenue in Arm AGI CPU across fiscal 2027 and 2028 has increased over the last 90 days.”
- AGI CPU Revenue Target
- Data Center Royalties
- Memory Price Pressure
Summary and Review
Summary
Arm reported second-quarter revenue of $1.44B. That is a second-quarter record, up 27.1% year over year. Revenue beat the $1.38B market expectation by 4.6%, so the revenue gate is open. Adjusted EPS was $0.52 against a $0.47 estimate, opening the earnings gate by 10.6%. The midpoint of third-quarter guidance is in line with expectations. Revenue of $1.54B sits 0.7% above the estimate, and EPS of $0.56 sits 1.8% above.
The stock closed at $191.80 on November 4, before the report. It slipped about 1.8% after hours. The next day it fell 13.1% to $166.72, after touching an intraday low of $163.13. The market did not read this report as a licensing story; it read it as a royalty story. Royalty revenue came in at $670M. That is roughly 5-7% below expectations. The company says expensive memory is weighing on phone sales, and that pressure is reaching royalties.
Score 71, verdict buy. Two gates are open and the guidance gate is in line. Three caveats keep the score at the low end of its band. Royalty revenue missed, shifting the growth burden to lumpy licensing revenue. GAAP net income fell 45% to $130M. Free cash flow dropped 73% to $110M. On the other hand, data center royalties doubled. The revenue target for its own AGI CPU chip also went up.
Full Review
Licensing carried the growth.
License and other revenue reached $773M. That is up 50% year over year and a quarterly record. Royalty revenue was $670M, up only 8%. Licensing therefore made up 54% of total revenue. A year ago that share was 45%. Licensing revenue swings with the quarter in which new deals are signed. Royalties come from every chip sold and recur more reliably. Annualized contract value rose 12% to $1.79B. That shows the licensing base is widening. But the market prices Arm as a long-term royalty machine. So the quality of the quarter is more mixed than the revenue record suggests.
The phone market is slowing royalties.
The main reason royalty growth stopped at 8% is the smartphone market. The company wrote that the impact of memory pricing on the smartphone market partly offset royalty growth. On the earnings call, CFO Jason Child said high memory prices are pressuring phone sales, especially in the mid and lower tiers. Third-quarter guidance also assumes weaker phone demand. Still, royalties hold strong pieces. Data center royalties doubled year over year. Physical AI royalties rose 50%. The royalty rate per chip is also rising. Partners shipped more than 10 billion Arm-based chips this quarter. That is 1.5 billion more than a year ago. So volume is growing. The problem is that phones still weigh heavily in royalty revenue.
Adjusted profit strong, GAAP profit weak.
Adjusted operating income was $638M, up 37% year over year. The adjusted operating margin rose from 41.1% to 44.2%, a gain of 3.1 points. The adjusted gross margin of 97.9% was 0.3 points below last year's 98.2%. The GAAP picture is different. GAAP operating expenses rose 27% to $1.20B. GAAP net income fell from $238M to $130M, down 45%. GAAP EPS was $0.12. The gap between GAAP and adjusted operating expenses is $426M. Cash flow was also weak. Operating cash flow fell 63% to $207M. Free cash flow was $110M, down 73%. Trailing twelve-month free cash flow, however, rose 2% to $1.10B.
Data center and AGI CPU are a second engine.
According to the company, Arm-based servers made up 15% of top cloud providers' servers in 2024. That share passed 50% in 2025 and is expected to top 60% by the end of 2026. Arm no longer just licenses designs; it will also sell its own server processor, the AGI CPU. The company targets up to $2B in revenue from this chip across fiscal 2027 and 2028. The previous target was more than $1B. First commercial deliveries start in the fiscal fourth quarter, January to March 2027. Oracle's cloud infrastructure plans to offer AGI CPU instances in 2027. But selling its own chip changes the margin structure. According to the earnings call, the first version's gross margin will be around 40%. That is far below the licensing business's 98% margin.
Next quarter, watch one line.
Next quarter, watch one number: royalty revenue. Guidance shared on the earnings call points to low-teens sequential royalty growth. That means royalty revenue of around $750M. If royalties come in above that, the phone pressure was temporary. The licensing surge would then read as the start of repeatable growth. If royalties fall below $720M, the growth burden still sits on lumpy licensing revenue. The second measure is free cash flow. This quarter's $110M is less than a fifth of adjusted net income. Profit needs to turn into cash; see the cash flow guide. For a general method of reading earnings day, see the guide.
Looking Ahead
Strengths and Risks
5 Strengths · 5 RisksStrengths
5- Revenue rose 27.1% year over year to $1.44B, beating estimates by 4.6%.
- Licensing revenue rose 50% to a quarterly record of $773M.
- The adjusted operating margin widened 3.1 points to 44.2%.
- Data center royalties doubled year over year.
- The AGI CPU revenue target for fiscal 2027-2028 was raised to up to $2B.
Risks
5- Royalty revenue of $670M came in roughly 5-7% below expectations.
- High memory prices are pressuring mid and lower-tier phone sales.
- GAAP net income fell 45% year over year to $130M.
- Free cash flow dropped 73% year over year to $110M.
- The first AGI CPU's gross margin will sit far below the licensing business.
What to Watch
3- First commercial AGI CPU deliveries begin in the fiscal fourth quarter, January to March 2027.
- Oracle's cloud infrastructure plans to offer AGI CPU instances in 2027.
- Fiscal third-quarter earnings are expected in February 2027.
Upcoming Earnings
To Understand This