ARM: AI helps achieve performance targets, high valuation remains a "sweet burden"

ARM (ARM.O) released its Q3 2025 financial report (ending December 2024) after U.S. stock market hours on February 6, 2025, Beijing time. The key points are as follows:

1. Overall Performance: Revenue & Profit are both growing. ARM achieved revenue of $983 million in Q3 of fiscal year 2025 (i.e., 24Q4), a year-on-year increase of 19.3%, slightly better than market expectations ($948 million). The growth in revenue this quarter is mainly attributed to the simultaneous growth of the licensing and royalty businesses; $Arm(ARM.US) net profit this quarter was $252 million, with a significant year-on-year increase, slightly better than market expectations ($202 million). Due to economies of scale, the company's operating expense ratio has decreased, leading to further growth in performance.

2. Business Segmentation: Royalties account for nearly 60%:

1) Licensing Business: $403 million, a year-on-year increase of 14%. As for Annual Contract Value (ACV), Q3 ACV reached $1.27 billion, a year-on-year increase of 9%;

2) Royalty Business: $580 million, a year-on-year increase of 23%. The growth is mainly due to the continued adoption of the Armv9 architecture and chip shipments based on the Computing Subsystem (CSS);

3. ARM Performance Guidance: For Q4 of fiscal year 2025 (i.e., 25Q1), expected revenue is $1.175-1.275 billion (market expectation $1.228 billion) and adjusted profit per share is expected to be $0.48 to $0.56 (market expectation $0.53).**

Overall View of Dolphin: ARM's financial report is decent but does not provide obvious highlights.

The company's revenue grew as expected, with the gross margin further increasing to 97.2% this quarter. Driven by economies of scale, the company's operating expense ratio decreased to 25.1% this quarter, further boosting profit growth.

Driven by demand from AI and other sectors, both the licensing and royalty businesses achieved double-digit growth this quarter. The number of licensing business customers increased to 335, and the Armv9 architecture in the royalty business has risen to 25%. Looking at the guidance for the next quarter, the company has provided a revenue guidance of $1.175-1.275 billion and a Non-GAAP profit per share guidance of $0.48-0.56. Both revenue and profit have increased, showing a positive trend in the company's operations.

Due to factors such as revenue recognition timing affecting certain businesses, the company's Annual Contract Value (ACV) and Remaining Performance Obligations (RPO) are also quite critical. This quarter, the company's ACV increased by 1.4% quarter-on-quarter, while RPO decreased by 2.4%. Dolphin Jun speculates that the company may have adjusted the terms and duration of the authorization contracts, launching more short-term but higher-value contracts, thereby enhancing the company's performance.

Overall, ARM's financial report this time is acceptable, basically meeting expectations. However, it cannot be ignored that the company's revenue growth for the fiscal year 2025 is only about 24%, and the core business is also unlikely to see rapid growth in the fiscal year 2026. Considering the company's expectations, the current stock price corresponds to a PE ratio of over 200 times for the fiscal year 2025. If the company cannot deliver significantly better-than-expected results, it will still face certain pressure under the current high valuation.

Here is Dolphin Jun's specific analysis of ARM:

1. Overall Performance: Revenue & Profit, Both Growing

1.1 Revenue Side

ARM achieved revenue of $983 million in the third quarter of the fiscal year 2025 (i.e., 24Q4), a year-on-year increase of 19.3%, slightly better than market expectations ($948 million). The company's revenue continued to increase this quarter, with both licensing and royalty businesses experiencing double-digit growth.

1.2 Gross Profit Side

ARM achieved a gross profit of $955 million in the third quarter of the fiscal year 2025 (i.e., 24Q4), a year-on-year increase of 21.1%. The year-on-year growth rate of gross profit is slightly higher than that of revenue.

ARM's gross margin this quarter was 97.2%, an increase of 1.6 percentage points year-on-year, slightly better than market expectations (96.7%). As the company's revenue scale expands, the overall gross margin shows a steady upward trend, reaching 97% for the first time this quarter.

1.3 Operating Expenses

ARM's operating expenses in the third quarter of the fiscal year 2025 (i.e., 24Q4) were $780 million, a year-on-year increase of 19.3%. The company maintains high investment, with the current operating expense ratio still reaching 79.3%.

Looking at the specific expense situation, broken down:

1) R&D Expenses: The company's R&D expenses this quarter were $533 million, a year-on-year increase of 23.4%. The number of engineers in the company continued to grow to 6,594, and R&D investment also increased quarter-on-quarter.

2) Sales and Management Expenses: The company's sales and management expenses this quarter were $247 million, a year-on-year increase of 14.4%. Sales slightly increased this quarter, with a sales management expense ratio of 25.1%.

1.4 Net Profit

ARM achieved a net profit of $252 million in the third quarter of fiscal year 2025 (i.e., 24Q4), showing growth both year-on-year and quarter-on-quarter, better than market expectations ($202 million). If we look solely at the operational situation, the company's operating profit for this quarter increased to $175 million, mainly due to the expansion of revenue scale.

The company's net profit margin this quarter is 25.6%. Although ARM has an extremely high gross margin, most of the company's expenses are directed towards R&D, sales, and other operational costs. Even with a gross margin of 97%, the nearly 80% operating expense ratio directly squeezes the company's final profit.

Currently, the company's gross margin does not have much room for improvement; the company mainly achieves an increase in operating profit by expanding revenue scale, generating economies of scale, and thereby reducing the proportion of operating expenses.

2. Business Segmentation: Royalties Account for Nearly 60%

From ARM's business segmentation, the licensing and royalty businesses are nearly 46% each this quarter. The company's business is currently benefiting from demand driven by AI and other factors, and with the continuous growth of royalty income, the current revenue proportion has increased to around 60%, while the licensing business accounts for 41% this quarter.

2.1 Licensing Business

ARM's licensing business achieved revenue of $403 million in the third quarter of fiscal year 2025 (i.e., 24Q4), a year-on-year increase of 13.8%.

Due to normal fluctuations in the timing and scale of multiple high-value licensing agreements, as well as contributions from backlog orders, licensing revenue varies each quarter. For the company, the main focus is on Annual Contract Value (ACV) to better understand the potential growth rate of the licensing business.

This quarter, the Annual Contract Value (ACV) increased to $1.27 billion, a year-on-year growth of 9%, which has slowed down but is above the company's long-term plan (7%). Additionally, the company's Remaining Performance Obligations (RPO) fell to $2.325 billion quarter-on-quarter, as Arm delivered products and recognized revenue from backlog orders in the income statement. The company expects to recognize about 28% of the remaining performance obligations as revenue within the next 12 months, 17% in the subsequent 13 to 24 months, and the remainder thereafter.

The number of fully licensed customers and flexible licensed customers both increased this quarter. The number of fully licensed customers rose to 40, while the number of flexible licensed customers increased to 295, and the overall number of customers continued to rise.

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2.2 Royalty Business

ARM's royalty licensing business achieved revenue of $580 million in the third quarter of fiscal year 2025 (i.e., 24Q4), a year-on-year increase of 23.4%. The growth in royalty licensing business is mainly attributed to the continued adoption of the Armv9 architecture and the shipment of chips based on the Computing Subsystem (CSS) ( such as MediaTek's Dimensity 9400 chip, which has been applied in OPPO and vivo's flagship smartphones).

This quarter, royalty revenue from chips in the smartphone, data center, networking equipment, and automotive sectors met the company's expectations, while royalty revenue in the Internet of Things sector showed signs of recovery after several quarters of weakness. The current revenue share from the Armv9 architecture has stabilized at 25%.

Dolphin Investment Research on ARM and related companies

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